Q&A Hero

Q: An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the ________ stage. A) start-up B) consolidation C) maturity D) relative decline

Q: The goal of supply-side policies is to ________. A) increase government involvement in the economy B) create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods C) maximize tax revenues of the government D) focus more on wealth redistribution policies

Q: The fed funds rate is the ________. A) interest rate that banks charge their best corporate customers B) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed C) interest rate the Fed charges commercial banks on short-term loans D) interest rate that the U.S. Treasury pays on its bills

Q: Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be ________. A) $90,000 B) $210,000 C) $300,000 D) $630,000

Q: Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be ________. A) $0 B) $90,000 C) $180,000 D) $270,000

Q: An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ________. A) sector rotation B) contraction/expansion analysis C) life-cycle analysis D) business-cycle shifting

Q: Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: I. Maturity II. Relative decline III. Consolidation A) III, I, II B) I, III, II C) III, II, I D) I, II, III

Q: The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be ________. A) 2.91% B) 3.85% C) 1.45% D) 2.12%

Q: Increases in the money supply will cause demand for investment and consumption goods to ________ in the short run and may cause prices to ________ in the long run. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: If interest rates increase, business investment expenditures are likely to ________ and consumer durable expenditures are likely to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: If the currency of your country is depreciating, this should ________ exports and ________ imports. A) stimulate; stimulate B) stimulate; discourage C) discourage; stimulate D) discourage; discourage

Q: The discount rate is the ________. A) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed B) interest rate the Fed charges commercial banks on short-term loans C) interest rate that the U.S. Treasury pays on its bills D) interest rate that banks charge their best corporate customers

Q: Assume that the Federal Reserve increases the money supply. This will cause: I. Interest rates to decrease II. Consumption and investment to decrease III. Inflation to fall A) I only B) I and II only C) II and III only D) I, II, and III

Q: An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called ________ analysis. A) bottom-up B) outside-inside C) top-down D) upside-down

Q: Which of the following is the rate at which the general level of prices for goods and services is rising? A) the exchange rate B) the gross domestic product growth rate C) the inflation rate D) the real interest rate

Q: Which of the following describes the percentage of the total labor force that has yet to find work? A) the capacity utilization rate B) the participation rate C) the unemployment rate D) the natural rate

Q: A firm in the early stages of its industry life cycle will likely have ________. A) low dividend payout rates B) low rates of investment C) low rates of return on investment D) low R&D spending

Q: Members of the Board of Governors of the Federal Reserve System are appointed by ________ to serve ________ terms. A) the Senate; 10-year B) the House of Representatives; 8-year C) the President; 14-year D) the Secretary of the Treasury; 6-year

Q: If the economy is going into a recession, a good industry to invest in would be the ________ industry. A) automobile B) banking C) construction D) medical services

Q: If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because ________. A) you have more information than others B) you are a better analyst than others C) you have the same information as others D) you are an equally good analyst as others

Q: Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the ________ stage of the business cycle. A) peak B) contraction C) trough D) expansion

Q: Which one of the following is not a U.S. supply shock? A) unions force an increase in national wage rates. B) the oil supply from the Middle East drops 30%. C) extended droughts reduce U.S. food production 25%. D) chinese purchases of U.S. exports increase.

Q: Which one of the following is not a demand shock? A) increase in government spending B) increases in the money supply C) reductions in consumer spending D) improvements in education of U.S. workers

Q: The stock price index and contracts and orders for nondefense capital goods are ________. A) leading economic indicators B) coincidental economic indicators C) lagging economic indicators D) leading and coincidental indicators, respectively

Q: An example of a highly cyclical industry is the ________. A) automobile industry B) tobacco industry C) pharmaceutical industry D) utility industry

Q: Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? A) the nominal exchange rate B) the nominal interest rate C) the real exchange rate D) the real interest rate

Q: Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product A) II only B) I and II only C) I and III only D) I, II, and III

Q: Everything else equal, an increase in the government budget deficit would: I. Increase the government's demand for funds II. Shift the demand curve for funds to the left III. Increase the interest rate in the economy A) II only B) I and II only C) I and III only D) I, II, and III

Q: The ratio of the purchasing power of two economies is termed the ________. A) balance of trade B) real exchange rate C) real interest rate D) nominal exchange rate

Q: The average duration of unemployment is ________. A) a leading economic indicator B) a coincidental economic indicator C) a lagging economic indicator D) both a coincidental indicator and a lagging indicator

Q: ________ in interest rates are associated with stock market declines. A) Anticipated increases B) Unanticipated increases C) Anticipated decreases D) Unanticipated decreases

Q: In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a ________. A) demand shock B) supply shock C) monetary shock D) refinery shock

Q: Which of the following is a strategy to shield net worth from interest rate movements? A) interest rate management B) immunization C) convexity management D) intermarket spread swap

Q: Duration measures A) the effective maturity of a bond. B) the weighted average of the time until each payment is received, with weights proportional to the present value of the payment. C) the average maturity of the bond's promised cash flows. D) all of the options.

Q: Which of the following statements is false? A) Bond prices and yields are inversely related. B) An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. C) Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. D) Interest rate risk is inversely related to the bond's coupon rate.

Q: A ________ investment strategy takes market prices of securities as set fairly. A) passive B) active C) interest rate focused D) convex

Q: In 2012, the S&P 500 increased 16%. Given the low interest rate environment, many large companies had to pour billions of dollars into their pension funds. This example illustrates ________. A) horizon analysis B) convexity C) cash flow matching and dedication D) duration mismatch

Q: Convexity of a bond is ________. A) the same as horizon analysis B) the rate of change of the slope of the price-yield curve divided by the bond price C) a measure of bond duration D) none of these options

Q: You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is ________. A) $638.85 B) $642.54 C) $666.88 D) $705.03

Q: You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is ________. A) $1,098.45 B) $1,104.56 C) $1,113.41 D) $1,124.22

Q: Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises. A) I and III only B) II and IV only C) I and IV only D) II and III only

Q: Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. A) I only B) II only C) I and III only D) I, II, and III

Q: Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: I. The portfolio must be rebalanced every time interest rates change. II. The portfolio must be rebalanced over time even if interest rates don't change. III. Convexity implies duration-based immunization strategies don't work. A) I only B) I and II only C) II only D) I, II, and III

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall. A) I only B) II only C) I and II only D) I, II, and III

Q: What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A) cash flow matching B) index tracking C) yield pickup swaps D) substitution swap

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ________. A) interest rates increase B) interest rates stay the same C) interest rates fall D) The answer cannot be determined from the information given.

Q: Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A) Switch from low-duration to high-duration bonds. B) Switch from high-duration to low-duration bonds. C) Switch from high-grade to low-grade bonds. D) Switch from low-coupon to high-coupon bonds.

Q: A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A) Buy the 5-year bonds, and short the surrounding maturity bonds. B) Buy the 5-year bonds, and buy the surrounding maturity bonds. C) Short the 5-year bonds, and short the surrounding maturity bonds. D) Short the 5-year bonds, and buy the surrounding maturity bonds.

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ________. A) interest rates increase B) interest rates stay the same C) interest rates fall D) The answer cannot be determined from the information given.

Q: The duration is independent of the coupon rate only for which one of the following? A) discount bonds B) premium bonds C) perpetuities D) short-term bonds

Q: Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ________. A) the dollar amount of the investment received in year t B) the percentage of the future value of the investment received in year t C) the present value of the dollar amount of the investment received in year t D) the percentage of the total present value of the investment received in year t

Q: If an investment returns a higher percentage of your money back sooner, it will ________. A) be less price-volatile B) have a higher credit rating C) be less liquid D) have a higher modified duration

Q: You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment? A) 4 years B) 3.5 years C) 3.22 years D) 2.95 years

Q: When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A) Price volatility increases at an increasing rate. B) Price volatility increases at a decreasing rate. C) Price volatility decreases at a decreasing rate. D) Price volatility decreases at an increasing rate.

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 10 years 6.76 years If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be ________. A) 11% B) 13% C) 12% D) 10%

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 10 years 6.76 years If the maturity of the bond was less than 10 years, the modified duration would be ________ compared to the original modified duration. A) larger B) unchanged C) smaller D) The answer cannot be determined from the information given.

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 10 years 6.76 years If the bond's coupon was smaller than 10%, the modified duration would be ________ compared to the original modified duration. A) larger B) unchanged C) smaller D) The answer cannot be determined from the information given.

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 10 years 6.76 years The modified duration for the Steel Pier bond is ________. A) 6.15 years B) 5.95 years C) 6.49 years D) 9.09 years

Q: As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A) greater reinvestment risk B) greater price volatility C) less call protection D) shorter average maturity

Q: If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon. A) I only B) I and II only C) II and III only D) I, II, and III

Q: An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a ________ coupon and a ________ term to maturity. A) low; long B) high; short C) high; long D) zero; long

Q: Which of the following set of conditions will result in a bond with the greatest price volatility? A) a high coupon and a short maturity B) a high coupon and a long maturity C) a low coupon and a short maturity D) a low coupon and a long maturity

Q: To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond. A) 50% B) 55% C) 60% D) 75%

Q: An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a ________ in the bond's price. A) 1.15% decrease B) 1.2% increase C) 1.53% increase D) 2.43% decrease

Q: Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%. A) 2.45 B) 2.75 C) 2.88 D) 3

Q: Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%. A) 3.92 B) 4.28 C) 4.55 D) 5

Q: The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate A) I only B) I and II only C) II and III only D) I, II, and III

Q: The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________. A) buy the AA and short the AAA B) buy both the AA and the AAA C) buy the AAA and short the AA D) short both the AA and the AAA

Q: Duration facilitates the comparison of bonds with differing ________. A) default risks B) conversion ratios C) maturities D) yields to maturity

Q: When interest rates increase, the duration of a 20-year bond selling at a premium ________. A) increases B) decreases C) remains the same D) increases at first and then declines

Q: A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately ________. A) $1,035 B) $1,036 C) $1,094 D) $1,124

Q: A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the bond's modified duration? A) 12 years B) 11.1 years C) 9.5 years D) 8.8 years

Q: A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The modified duration of this bond is ________ years. A) 4 B) 3.56 C) 3.36 D) 3.05

Q: A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The duration of this bond is ________ years. A) 2.44 B) 3.23 C) 3.56 D) 4.1

Q: A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be ________ if its yield is 9%. A) 7 B) 9 C) 9.39 D) 12.11

Q: A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________. A) 1.22 B) 1.5 C) 1.6 D) 2

Q: A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is ________. A) 4.32 B) 4 C) 3.25 D) 3.75

Q: A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is ________ years. A) 7.46 B) 8.08 C) 9.02 D) 10.11

Q: Where y = yield to maturity, the duration of a perpetuity would be ________. A) y B) y/(1 + y) C) 1/y D) (1 + y)/y

Q: The duration rule always ________ the value of a bond following a change in its yield. A) underestimates B) provides an unbiased estimate of C) overestimates D) The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.