Q&A Hero

Q: A credit default swap is A. a fancy term for a low-risk bond. B. an insurance policy on the default risk of a federal government bond or loan. C. an insurance policy on the default risk of a corporate bond or loan. D. an insurance policy on the default risk of federal government and corporate bonds and loans. E. None of the options are correct.

Q: A CDS is a A. command duty supervisor. B. collateralized debt security. C. commercial debt servicer. D. collateralized debenture security. E. credit default swap.

Q: A CDO is a A. command duty officer. B. collateralized debt obligation. C. commercial debt originator. D. collateralized debenture originator. E. common debt officer.

Q: One year ago, you purchased a newly-issued TIPS bond that has a 4% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.6%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond? A. $40.00, $1,000 B. $41.44, $1,036 C. $40.00, $1,036 D. $36.00, $1,040 E. $76.00, $1,000

Q: One year ago, you purchased a newly-issued TIPS bond that has a 5% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond? A. $50.00, $1,000 B. $32.00, $1,032 C. $50.00, $1,032 D. $32.00, $1,050 E. $51.60, $1,032

Q: A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest 112 days ago, the invoice price of the bond would be A. $1,027.69. B. $1,027.35. C. $1,026.77. D. $1,027.98. E. $1,028.15.

Q: A 7.5% coupon bond with an ask price of $100.00 pays interest every 182 days. If the bond paid interest 62 days ago, the invoice price of the bond would be A. $1,011.67. B. $1,012.35. C. $1,012.77. D. $1,011.98. E. $1,012.15.

Q: TIPS are A. securities formed from the coupon payments only of government bonds. B. securities formed from the principal payments only of government bonds. C. government bonds with par value linked to the general level of prices. D. government bonds with coupon rates linked to the general level of prices. E. zero-coupon government bonds.

Q: Convertible bonds A. give their holders the ability to share in price appreciation of the underlying stock. B. offer lower coupon rates than similar nonconvertible bonds. C. offer higher coupon rates than similar nonconvertible bonds. D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds. E. give their holders the ability to share in price appreciation of the underlying stock and offer higher coupon rates than similar nonconvertible bonds.

Q: The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A. deferral. B. reissue. C. repurchase. D. refunding. E. None of the options are correct.

Q: Most corporate bonds are traded A. on a formal exchange operated by the New York Stock Exchange. B. by the issuing corporation. C. over the counter by bond dealers linked by a computer quotation system. D. on a formal exchange operated by the American Stock Exchange. E. on a formal exchange operated by the Philadelphia Stock Exchange.

Q: The bond indenture includes A. the coupon rate of the bond. B. the par value of the bond. C. the maturity date of the bond. D. All of the options are correct. E. None of the options are correct.

Q: Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is A. zero. B. $14.87. C. $45.85. D. $7.44. E. None of the options are correct.

Q: Which one of the following statements about convertibles are false? I) The longer the call protection on a convertible, the less the security is worth. II) The more volatile the underlying stock, the greater the value of the conversion feature. III) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. IV) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. A. I only B. II only C. I and III D. IV only E. I, III, and IV

Q: Which one of the following statements about convertibles is true? A. The longer the call protection on a convertible, the less the security is worth. B. The more volatile the underlying stock, the greater the value of the conversion feature. C. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. E. Convertibles are not callable.

Q: The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with a value at maturity of $1,000 is A. 5.1%. B. 8.8%. C. 10.8%. D. 13.4%. E. None of the options are correct.

Q: Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately A. $308. B. $315. C. $464. D. $555. E. None of the options are correct.

Q: A bond with a 12% coupon, 10 years to maturity, and selling at $88.00 has a yield to maturity of A. over 14%. B. between 13% and 14%. C. between 12% and 13%. D. between 10% and 12%. E. less than 12%.

Q: Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________. A. minimize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B. maximize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C. minimize the holders'interest rate risk; give the investor the ability to benefit from interest rate changes D. maximize the holders'interest rate risk; give investor the ability to share in the profits of the issuing company E. None of the options are correct.

Q: A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are A. 3.33% and 2.10%. B. 2.57% and 2.86%. C. 1.2% and 1.0%. D. 0.76% and 0.47%. E. None of the options are correct.

Q: A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are A. 1.0% and 1.2%. B. 0.5% and .7%. C. 1.2% and 1.0%. D. 0.7% and 0.5%. E. None of the options are correct.

Q: A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The default risk premiums on the bonds issued by Exxon and Lucent Technologies, respectively, are A. 1.6% and 3.3%. B. 0.5% and 0.7%. C. 3.3% and 1.6%. D. 0.7% and 0.5%. E. None of the options are correct.

Q: A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are A. 1.0% and 1.2%. B. 0.7% and 1.5%. C. 1.2% and 1.0%. D. 0.8% and 1.3%. E. None of the options are correct.

Q: Callable bonds A. are called when interest rates decline appreciably. B. have a call price that declines as time passes. C. are called when interest rates increase appreciably. D. are more likely to be called when interest rates decline and have a call price that declines as time passes. E. have a call price that declines as time passes and are called when interest rates increase appreciably.

Q: A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date. A. callable B. coupon C. put D. Treasury E. zero-coupon

Q: A coupon bond is a bond that A. pays interest on a regular basis (typically every six months). B. does not pay interest on a regular basis but pays a lump sum at maturity. C. can always be converted into a specific number of shares of common stock in the issuing company. D. always sells at par value. E. None of the options are correct.

Q: The _________ gives the number of shares for which each convertible bond can be exchanged. A. conversion ratio B. current ratio C. P/E ratio D. conversion premium E. convertible floor

Q: The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity. A. current yield B. dividend yield C. P/E ratio D. yield to maturity E. discount yield

Q: Ceteris paribus, the price and yield on a bond are A. positively related. B. negatively related. C. sometimes positively and sometimes negatively related. D. not related. E. indefinitely related.

Q: The bond market A. can be quite "thin." B. primarily consists of a network of bond dealers in the over-the-counter market. C. consists of many investors on any given day. D. can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market. E. primarily consists of a network of bond dealers in the over-the-counter market and consists of many investors on any given day.

Q: The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B" rating indicates A. the bonds are insured. B. the bonds are junk bonds. C. the bonds are referred to as "high-yield" bonds. D. the bonds are insured or junk bonds. E. the bonds are "high-yield" or junk bonds.

Q: A coupon bond is reported as having an ask price of 113% of the $1,000 par value in the Wall Street Journal. If the last interest payment was made two months ago and the coupon rate is 12%, the invoice price of the bond will be A. $1,100. B. $1,110. C. $1,150. D. $1,160. E. None of the options are correct.

Q: A coupon bond is reported as having an ask price of 108% of the $1,000 par value in the Wall Street Journal. If the last interest payment was made one month ago and the coupon rate is 9%, the invoice price of the bond will be A. $1,087.50. B. $1,110.10. C. $1,150.00. D. $1,160.25. E. None of the options are correct.

Q: An 8% coupon U.S. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. The accrued interest on the $100,000 face value of this note is A. $491.80. B. $800.00. C. $983.61. D. $1,661.20. E. None of the options are correct.

Q: The invoice price of a bond that a buyer would pay is equal to A. the asked price plus accrued interest. B. the asked price less accrued interest. C. the bid price plus accrued interest. D. the bid price less accrued interest. E. the bid price.

Q: Accrued interest A. is quoted in the bond price in the financial press. B. must be paid by the buyer of the bond and remitted to the seller of the bond. C. must be paid to the broker for the inconvenience of selling bonds between maturity dates. D. is quoted in the bond price in the financial press and must be paid by the buyer of the bond and remitted to the seller of the bond. E. is quoted in the bond price in the financial press and must be paid to the broker for the inconvenience of selling bonds between maturity dates.

Q: At issue, coupon bonds typically sell A. above par value. B. below par value. C. at or near par value. D. at a value unrelated to par. E. None of the options are correct.

Q: A firm with a low rating from the bond-rating agencies would have A. a low times-interest-earned ratio. B. a low debt-to-equity ratio. C. a low quick ratio. D. a low debt-to-equity ratio and a low quick ratio. E. a low times-interest-earned ratio and a low quick ratio.

Q: To earn a high rating from the bond-rating agencies, a firm should have A. a low times-interest-earned ratio. B. a low debt-to-equity ratio. C. a high quick ratio. D. a low debt-to-equity ratio and a high quick ratio. E. a low times-interest-earned ratio and a high quick ratio.

Q: Of the following five investments, ________ is (are) considered the least risky. A. Treasury bills B. corporate bonds C. U.S. agency issues D. Treasury bonds E. commercial paper

Q: Tests of multifactor models indicate A. the single factor model has better explanatory power in estimating security returns. B. macroeconomic variables have no explanatory power in estimating security returns. C. it may be possible to hedge some economic factors that affect future consumption risk with appropriate portfolios. D. multifactor models do not work. E. None of the options are correct.

Q: Which of the following would be required for tests of the multifactor CAPM and APT? A. Specification of risk factors B. Identification of portfolios that hedge these fundamental risk factors C. Tests of the explanatory power and risk premiums of the hedge portfolios D. All of the options are correct. E. None of the options are correct.

Q: Strongest evidence in support of the CAPM has come from demonstrating that A. the market beta is equal to 1.0. B. nonsystematic risk has significant explanatory power in estimating security returns. C. the average return beta relationship is highly significant. D. the intercept in tests of the excess returns beta relationship is exactly zero. E. professional investors do not generally outperform market indexes, demonstrating that the market is efficient.

Q: One way that Black, Jensen and Scholes overcame the problem of measurement error was to A. group securities into portfolios. B. use a two stage regression methodology. C. reduce the precision of beta estimates. D. set alpha equal to one. E. None of the options are correct.

Q: According to Roll, the only testable hypothesis associated with the CAPM is A. the number of ex post mean variance efficient portfolios. B. the exact composition of the market portfolio. C. whether the market portfolio is mean variance efficient. D. the SML relationship. E. None of the options are correct.

Q: Early tests of the CAPM involved A. establishing sample data. B. estimating the security characteristic line. C. estimating the security market line. D. All of the options are correct. E. None of the options are correct.

Q: In their multifactor model, Chen, Roll, and Ross found A. that two market indexes, the equally weighted NYSE and the value weighted NYSE, were not significant predictors of security returns. B. that the value weighted NYSE index had the incorrect sign, implying a negative market risk premium. C. expected changes in inflation predicted security returns. D. that two market indexes, the equally weighted NYSE and the value weighted NYSE, were not significant predictors of security returns and that the value weighted NYSE index had the incorrect sign, implying a negative market risk premium. E. All of the options are correct.

Q: The CAPM is not testable unless A. the exact composition of the true market portfolio is known and used in the tests. B. all individual assets are included in the market proxy. C. the market proxy and the true market portfolio are highly negatively correlated. D. the exact composition of the true market portfolio is known and used in the tests, and all individual assets are included in the market proxy. E. all individual assets are included in the market proxy and the market proxy, and the true market portfolio are highly negatively correlated.

Q: Benchmark error A. refers to the use of an incorrect market proxy in tests of the CAPM. B. can result in inconclusive tests of the CAPM. C. can result in incorrect evaluation measures for portfolio managers. D. refers to the use of an incorrect market proxy in tests of the CAPM and can result in inconclusive tests of the CAPM. E. All of the options are correct.

Q: Consider the regression equation: ri rf = g0 + g1bi + eit where: ri rf = the average difference between the monthly return on stock i and the monthly risk free rate bi = the beta of stock i This regression equation is used to estimate A. the benchmark error. B. the security market line. C. the capital market line. D. the benchmark error and the security market line. E. the benchmark error, the security market line, and the capital market line.

Q: Consider the regression equation: ri rf = g0 + g1bi + g2s2(ei) + eit where: ri rt = the average difference between the monthly return on stock i and the monthly risk free rate bi = the beta of stock i s2(ei) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g2, to be A. 0. B. 1. C. equal to the risk free rate of return. D. equal to the average difference between the monthly return on the market portfolio and the monthly risk free rate. E. None of the options are correct.

Q: Consider the regression equation: ri rf = g0 + g1bi + g2s2(ei) + eit where: ri rt = the average difference between the monthly return on stock i and the monthly risk free rate bi = the beta of stock i s2(ei) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g1, to be A. 0. B. 1. C. equal to the risk free rate of return. D. equal to the average difference between the monthly return on the market portfolio and the monthly risk free rate. E. equal to the average monthly return on the market portfolio.

Q: Consider the regression equation: ri rf = g0 + g1b1 + g2s2(ei) + eit where: ri rf = the average difference between the monthly return on stock i and the monthly risk free rate bi = the beta of stock i s2(ei) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g0, has to be A. 0. B. 1. C. equal to the risk free rate of return. D. equal to the average difference between the monthly return on the market portfolio and the monthly risk free rate. E. None of the options are correct.

Q: Consider the regression equation: rit rft = ai + bi(rmt rft) + eit where: rit = return on stock i in month t rft = the monthly risk free rate of return in month t rmt = the return on the market portfolio proxy in month t This regression equation is used to estimate A. the security characteristic line. B. benchmark error. C. the capital market line. D. All of the options are correct. E. None of the options are correct.

Q: The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses? A. Better econometrics should be used in the test procedure. B. Estimates of asset betas need to be improved. C. Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. D. The single index model needs to account for nontraded assets and the cyclical behavior of asset betas. E. All of the options are correct.

Q: In the 1972 empirical study by Black, Jensen, and Scholes, they found that the risk adjusted returns of high beta portfolios were _____________ the risk adjusted returns of low beta portfolios. A. greater than B. equal to C. less than D. unrelated to E. More information is necessary to answer this question.

Q: Kandel and Stambaugh (1995) expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating A. the inefficiency of the market proxy used in the tests. B. that the relationship between average return and beta is not linear. C. that the relationship between average return and beta is negative. D. the need for a better way of explaining security returns. E. None of the options are correct.

Q: In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors. A. the monthly growth rate in industrial production B. unexpected inflation C. expected inflation D. the monthly growth rate in industrial production and unexpected inflation E. the monthly growth rate in industrial production, unexpected inflation, and expected inflation

Q: If a market proxy portfolio consistently beats all professionally managed portfolios on a risk adjusted basis, it may be concluded that A. the CAPM is valid. B. the market proxy is mean/variance efficient. C. the CAPM is invalid. D. the CAPM is valid and the market proxy is mean/variance efficient. E. the market proxy is mean/variance efficient and the CAPM is invalid.

Q: Given the results of the early studies by Lintner (1965) and Miller and Scholes (1972), one would conclude that A. high beta stocks tend to outperform the predictions of the CAPM. B. low beta stocks tend to outperform the predictions of the CAPM. C. there is no relationship between beta and the predictions of the CAPM. D. high beta stocks and low beta stocks tend to outperform the predictions of the CAPM. E. None of the options are correct.

Q: If a professionally managed portfolio consistently outperforms the market proxy on a risk adjusted basis and the market is efficient, it should be concluded that A. the CAPM is invalid. B. the proxy is inadequate. C. either the CAPM is invalid or the proxy is inadequate. D. the CAPM is valid and the proxy is adequate. E. None of the options are correct.

Q: In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict. A. flatter than B. equal to C. steeper than D. one half as much as E. None of the options are correct.

Q: Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long. A. mental accounting B. regret avoidance C. overconfidence D. conservatism

Q: An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains, but may accept the same investment if it is posed in terms of risk surrounding potential losses. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A. regret avoidance. B. framing. C. mental accounting. D. overconfidence. E. obnoxicity.

Q: ________ bias means that investors are too slow in updating their beliefs in response to evidence. A. Framing B. Regret avoidance C. Overconfidence D. Conservatism E. None of the options are correct.

Q: Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A. overconfidence. B. framing. C. regret avoidance. D. sample neglect.

Q: ____________ may be responsible for the prevalence of active versus passive investments management. A. Forecasting errors B. Overconfidence C. Mental accounting D. Conservatism E. Regret avoidance

Q: Single men trade far more often than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A. framing B. selection bias C. overconfidence D. conservatism E. forecasting

Q: DeBondt and Thaler believe that high P/E result from investors' A. earnings expectations that are too extreme. B. earnings expectations that are not extreme enough. C. stock price expectations that are too extreme. D. stock price expectations that are not extreme enough.

Q: Forecasting errors are potentially important because A. research suggests that people underweight recent information. B. research suggests that people overweight recent information. C. research suggests that people correctly weight recent information. D. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. E. None of the options are correct.

Q: Information processing errors consist of I) forecasting errors. II) overconfidence. III) conservatism. IV) framing. A. I and II B. I and III C. III and IV D. IV only E. I, II, and III

Q: If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information, including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. All of the options are correct. E. None of the options are correct.

Q: Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by A. sector mutual funds. B. index funds. C. direct-sold funds. D. broker-sold funds. E. bank-sold mutual funds.

Q: Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within ____________ of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

Q: If you believe in the reversal effect, you should A. sell bonds in this period if you held stocks in the last period. B. sell stocks in this period if you held bonds in the last period. C. sell stocks this period that performed well last period. D. go long. E. sell stocks this period that performed well last period and go long.

Q: Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be A. extremely profitable for long-term traders. B. extremely profitable for short-term traders. C. marginally profitable for long-term traders. D. marginally profitable for short-term traders. E. not sufficiently profitable to cover trading costs.

Q: At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with A. regret avoidance. B. selection bias. C. overconfidence. D. the lucky event issue.

Q: Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with A. regret avoidance. B. selection bias. C. framing. D. insider trading.