1. Preston Inc.’s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm’s expected rate of return?
7.72% 8.12% 8.55% 9.00%
2. Moerdyk Company’s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm’s required rate of return?
11.36% 11.65% 11.95% 12.25%
3. The Morrissey Company’s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond’s price? $923.22 $946.30 $969.96 $994.21
4. Ezzell Enterprises’ non-callable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity? 6.20% 6.53% 6.87% 7.62%
5. If a firm raises capital by selling new bonds, it is called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk. True False
6. Which of the following statements is CORRECT? All else equal, senior debt generally has a lower yield to maturity than subordinated debt. An indenture is a bond that is less risky than a mortgage bond. The expected return on a corporate bond will generally exceed the bond’s yield to maturity. If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
7. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly. True False
8. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? Variance; correlation coefficient. Standard deviation; correlation coefficient. Beta; variance. Coefficient of variation; beta.
9. Which of the following statements is CORRECT? An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified, portfolio of stocks.
10. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT? If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price. The bond is selling below its par value. The bond is selling at a discount. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
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