Q&A Hero

Q: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,044 B) $938 C) $970 D) $1,102

Q: Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., at a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) Yes, the bond is worth more at $1,015. B) No, the bond is only worth $921. C) Yes, the bond is worth more at $951. D) No, the bond is only worth $912.

Q: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,037 B) $1,085 C) $861 D) $923

Q: Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)A) $1,048B) $965C) $1,099D) $982

Q: Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,024 B) $979 C) $886 D) $1,107

Q: Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)A) $1,023B) $1,137C) $916D) $897

Q: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)A) $972B) $1,066C) $1,014D) $923

Q: Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)A) $872B) $1,066C) $990D) $945

Q: Which one of the following statements about zero coupon bonds is NOT true? A) Zero coupon bonds have no coupon payments but promise a single payment at maturity. B) Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. C) Zero coupon bonds make coupon payments but no principal payment at maturity. D) All of the above statements are true.

Q: In calculating the current price of a bond paying semiannual coupons, one needs to A) use double the number of years for the number of payments made. B) use the semiannual coupon. C) use the semiannual rate as the discount rate. D) All of the above need to be done.

Q: Bonds sell at a premium when the market rate of interest is: A) less than the bond's coupon rate. B) greater than the bond's coupon rate. C) equal to the bond's coupon rate. D) None of the above is true.

Q: Bonds sell at a discount when the market rate of interest is: A) less than the bond's coupon rate. B) greater than the bond's coupon rate. C) equal to the bond's coupon rate. D) None of the above is true.

Q: If a bond's coupon rate is equal to the market rate of interest, then the bond will sell: A) at a price equal to its face value. B) at a price greater than its face value. C) at a price less than its face value. D) None of the above is true.

Q: Which one of the following statements about bonds is NOT true? A) To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. B) The value, or price, of any asset is the future value of its cash flows. C) The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity D) The expected future cash flows are estimated using the coupons that the bond will pay and the maturity value to be received.

Q: Which of the following statements is most true about zero coupon bonds? A) They typically sell at a premium over par when they are first issued. B) They typically sell for a higher price than similar coupon bonds. C) They are always convertible to common stock. D) They typically sell at a deep discount below par when they are first issued.

Q: Which of the following statements is true of convertible bonds? A) The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. B) The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. C) Firms that issue convertible bonds can do so at a lower interest rate. D) The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

Q: Which of the following statements is true? A) To secure the conversion option on a bond, bondholders would be willing to pay a premium. B) Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. C) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. D) All of the above are true.

Q: Which of the following statements is true of zero coupon bonds? A) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. B) Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. C) The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. D) All of the above are true.

Q: Which one of the following statements about vanilla bonds is NOT true? A) They have fixed coupon payments. B) The face value, or par value, for most corporate bonds is $1,000. C) Coupon payments are usually made quarterly. D) The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.

Q: It is easy for individuals to trade in the corporate bond market because: A) the corporate bond market is considered to be very transparent. B) prices in the corporate bond market tend to be more stable. C) centralized reporting of deals between buyers and sellers take place. D) None of the above statements is true.

Q: Which one of the following statements is NOT true? A) Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. B) Corporate bonds are more marketable than the securities that have higher daily trading volumes. C) The market for corporate bonds is thin compared to the market for corporate stocks. D) The largest investors in corporate bonds are life insurance companies and pension funds.

Q: Which of the following statements is true? A) The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. B) The market for corporate bonds is thin compared to the market for corporate stocks. C) Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. D) All of the above are true.

Q: The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. A) True B) False

Q: If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping. A) True B) False

Q: Upward-sloping yield curves often occur before the beginning of recession. A) True B) False

Q: U.S. Treasury securities are the best proxy measure for the risk-free rate. A) True B) False

Q: The risk that the lender may not receive payments as promised is called default risk. A) True B) False

Q: Bonds with a call provision pay lower yields than comparable noncallable bonds. A) True B) False

Q: All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity. A) True B) False

Q: Higher coupon bonds have greater interest rate risk. A) True B) False

Q: As interest rates fall, the prices of bonds decline. A) True B) False

Q: Interest rate risk is the risk that bond prices will fluctuate as interest rate changes. A) True B) False

Q: The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. A) True B) False

Q: The value, or price, of any asset is the present value of its future cash flows. A) True B) False

Q: Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. A) True B) False

Q: Zero coupon bonds sell well above their par value because they offer no coupons. A) True B) False

Q: The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity. A) True B) False

Q: Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity. A) True B) False

Q: Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes. A) True B) False

Q: Corporate bonds have a thin market relative to market for corporate stocks. A) True B) False

Q: A thin market for a security implies a high frequency of trades for that type of security in the markets. A) True B) False

Q: Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. A) True B) False

Q: Most secondary market transactions for corporate bonds take place on the New York Stock Exchange. A) True B) False

Q: The largest investors in corporate bonds are big institutional investors such as life insurance companies and pension funds. A) True B) False

Q: The largest investors in corporate bonds are state government agencies. A) True B) False

Q: While performing the regression analysis of historical returns of a stock with a historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta of the stock in question. However, in most instances the data points do not lie exactly on that line. Explain the reason.

Q: Explain the difference between systematic risk and unsystematic risk.

Q: Which of the following represents a plot of the relation between expected return and systemic risk? A) The beta coefficient B) The covariance of returns line C) The security market line D) The variance

Q: The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market?A) 2.5%B) 5.0%C) 7.5%D) 10.0%

Q: The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?A) 4.5%B) 5.0%C) 5.5%D) 6.0%

Q: The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta?A) 1.26B) 2.10C) 2.80D) 3.15

Q: The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? A) 8.40% B) 10.80% C) 13.80% D) 19.20%

Q: The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on Ricci Co.?A) 28.80%B) 37.80%C) 48.60%D) 57.60%

Q: The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore?A) 11.20%B) 19.20%C) 24.00%D) 32.00%

Q: A portfolio with a level of systematic risk is the same as that of the market has a beta that is A) equal to zero. B) equal to one. C) less than the beta of the risk-free asset. D) less than zero.

Q: Which of the following is the best measure of the systematic risk in a portfolio? A) Variance B) Standard deviation C) Covariance D) Beta

Q: Which of the following investors should be willing to pay the highest price for an asset? A) An investor with a single-asset portfolio. B) An investor with a diversified portfolio. C) An investor who is not completely diversified. D) An investor who is so risk-averse that he does not recognize the benefits of diversification.

Q: Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting ofA) 5 to 10 assets.B) 10 to 15 assets.C) 15 to 20 assets.D) 20 to 25 assets.

Q: Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? Round your answer to six decimal places. A) 0.028025 B) 0.217327 C) 0.359100 D) 0.993094

Q: The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks? A) 0.170200 B) 0.293347 C) 0.340823 D) 0.580199

Q: The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks?A) 0.090437B) 0.096200C) 0.90437D) 0.96200

Q: Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Do not round intermediate computations.Prob Stock 1 Stock 2 0.5 0.11 0.180.3 0.17 0.150.2 0.19 0.12A) 0.00120B) 0.00054C) -0.00271D) -0.97169

Q: Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Round your final answer to five decimal places.Prob Stock 1 Stock 2 0.5 0.11 0.180.3 0.17 0.150.2 0.19 0.12A) 0.00120B) 0.00054C) -0.00079D) -0.33720

Q: Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Do not round intermediate computations.Prob Stock 1 Stock 2 0.4 0.09 0.110.5 0.11 0.080.1 0.17 0.13A) 0.230967B) -0.00002548C) 0.00032100D) 0.17671455

Q: Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2.Prob Stock 1 Stock 2 0.4 0.09 0.110.5 0.11 0.080.1 0.17 0.13A) 0.000094B) 0.000516C) 0.000321D) 0.717507

Q: You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio?A) 6.2%B) 12.4%C) 13.0%D) 13.6%

Q: You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively? A) 7.7% B) 8.2% C) 8.7% D) 9.2%

Q: You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio? A) 15.2% B) 16.0% C) 16.8% D) 17.6%

Q: Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock?A) 0.000625B) 0.025000C) 0.625000D) 0.790500

Q: Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? Round your final answer to four decimal places.A) 0.0278B) 0.5556C) 1.8001D) 36.0002

Q: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy is in a growth phase (45.00% probability); a rate of return of 2.50% if the economy is in decline (20.00% probability); and a rate of return of "15.00% if the economy is in a depression (10.00% probability). What is View Point's standard deviation of returns? Do not round intermediate computations. Round your final answer to two decimal points.A) 17.31%B) 9.25%C) 15.00%D) 10.29%

Q: Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? Round the answer to five decimal points.A) 0.32122B) 0.54562C) 0.56676D) 0.75000

Q: Stock A has exhibited a standard deviation in stock returns of 0.5, whereas Stock B has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?A) 0.1549B) 0.2179C) 0.4668D) 0.5500

Q: Elrond has made an investment that will generate returns that are subject to the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond's investment. Do not round intermediate computations. Round your final answer to four decimal places.State Return Probability Weak 0.10 0.8OK 0.17 0.1Great 0.28 0.1A) 0.0536B) 0.0543C) 0.0550D) 0.0031

Q: Tommie has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. Do not round intermediate computations. Round your final answer to four decimal places.State Return Probability Weak 0.13 0.30OK 0.20 0.40Great 0.25 0.30A) 0.0453B) 0.0467C) 0.0481D) 0.0495

Q: If a random variable follows a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean? A) 95.00% B) 96.25% C) 97.50% D) 98.75%

Q: If a random variable follows a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean? A) 1.25% B) 2.50% C) 3.75% D) 5.00%

Q: You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 90 percent confident that it will not run out of food when feeding 50 college students?A) 17.90 poundsB) 21.05 poundsC) 53.95 poundsD) 57.10 pounds

Q: You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 90 percent of the goldfish are smaller from such size? Assume a normal distribution for the size of goldfish. Round your final answer to two decimal places.A) 1.01 inchesB) 1.09 inchesC) 1.91 inchesD) 1.99 inches

Q: The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? Round intermediate computations and final answer to 6 decimal places.Return Probability 0.10 0.250.20 0.500.25 0.25A) 0.002969B) 0.000613C) 0.015195D) 0.054486