Q&A Hero

Q: You purchased an annual interest coupon bond one year ago that now has six years remaining until maturity. The coupon rate of interest was 10%, and par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. The amount you paid for this bond one year ago was A. $1,057.50. B. $1,075.50. C. $1,088.50. D. $1.092.46. E. $1,104.13.

Q: A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in five years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is A. 6.00%. B. 8.33%. C. 12.00%. D. 60.00%. E. None of the options are correct.

Q: A coupon bond that pays interest semi-annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate is 12%. A. $922.77 B. $924.16 C. $1,075.80 D. $1,077.22 E. None of the options are correct.

Q: A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ________ if the coupon rate is 9.5%. A. $922.77 B. $1,010.12 C. $1,075.80 D. $1,077.22 E. None of the options are correct.

Q: A coupon bond that pays interest semi-annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be __________ if the coupon rate is 8%. A. $922.78 B. $924.16 C. $1,075.80 D. $1,077.20 E. None of the options

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%. A. $922.77 B. $924.16 C. $1,075.82 D. $1,077.20 E. None of the options

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%. A. $712.99 B. $960.14 C. $1,123.01 D. $886.28 E. $1,000.00

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%. A. $712.99 B. $620.92 C. $1,123.01 D. $886.28 E. $1,000.00

Q: A coupon bond that pays interest semi-annually is selling at a par value of $1,000, matures in seven years, and has a coupon rate of 8.6%. The yield to maturity on this bond is A. 8.0%. B. 8.6%. C. 9.0%. D. 10.0%. E. None of the options are correct.

Q: A coupon bond that pays interest annually is selling at a par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is A. 8.0%. B. 8.3%. C. 9.0%. D. 10.0%. E. None of the options are correct.

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

Q: A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 8.7%, and has a yield to maturity of 7.9%. The current yield on this bond is A. 8.39%. B. 8.43%. C. 8.83%. D. 8.66%. E. None of the options are correct.

Q: A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 11%, and has a yield to maturity of 12%. The current yield on this bond is A. 10.39%. B. 10.43%. C. 10.58%. D. 11.73%. E. None of the options are correct.

Q: A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is A. 8.65%. B. 8.45%. C. 7.95%. D. 8.36%. E. None of the options are correct.

Q: A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is A. 10.65%. B. 10.45%. C. 10.95%. D. 10.52%. E. None of the options are correct.

Q: If a 7.5% coupon bond is trading for $1,050.00, it has a current yield of A. 7.0%. B. 7.4%. C. 7.1%. D. 6.9%. E. 6.7%.

Q: If an 8% coupon bond is trading for $1,025.00, it has a current yield of A. 7.8%. B. 8.7%. C. 7.6%. D. 7.9%. E. 8.1%.

Q: If a 6% coupon bond is trading for $950.00, it has a current yield of A. 6.5%. B. 6.3%. C. 6.1%. D. 6.0%. E. 6.6%.

Q: If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of A. 7.38%. B. 6.64%. C. 7.25%. D. 7.61%. E. 7.18%.

Q: If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of A. 7.38%. B. 6.64%. C. 7.25%. D. 8.53%. E. 7.18%.

Q: If a 7.25% coupon bond is trading for $982.00, it has a current yield of A. 7.38%. B. 6.53%. C. 7.25%. D. 8.53%. E. 7.18%.

Q: If a 7% coupon bond is trading for $975.00, it has a current yield of A. 7.00%. B. 6.53%. C. 7.24%. D. 8.53%. E. 7.18%.

Q: The current yield on a bond is equal to A. annual interest payment divided by the current market price. B. the yield to maturity. C. annual interest divided by the par value. D. the internal rate of return. E. None of the options are correct.

Q: Liquidity embodies several characteristics, such as A. trading costs. B. ease of sale. C. market depth. D. necessary price concessions to effect a quick transaction. E. All of the options are correct.

Q: An extension of the Fama French three factor model includes a fourth factor to measure A. default spread. B. term spread. C. momentum. D. industrial production. E. inflation.

Q: An extension of the Fama French three factor model was introduced by A. Black. B. Scholes. C. Carhart. D. Jensen. E. Miller.

Q: The Fama French model I) is a useful tool for benchmarking performance against a well defined set of factors. II) premia are determined by market irrationality. III) premia are determined by rational risk factors. IV) is the reason that the premia is unsettled. V) is not a useful tool for benchmarking performance against a well defined set of factors. A. I only B. V only C. I and II D. I and IV E. II and V

Q: Studies by Chan, Karceski, and Lakonishok (2003) and La Porta, Lakonishok, Shleifer, and Vishny (1997) report that A. the value premium is a manifestation of market irrationality. B. the value premium is a rational risk premia. C. the value premium is a statistical artifact found only in the U.S. D. All of the options are correct. E. None of the options are correct.

Q: Petkova and Zhang (2005) examine the relationship between beta and the market risk premium and find A. a countercyclical beta is negative in good economies and positive in bad economies. B. the beta of the HML portfolio is negative in good economies and positive in bad economies. C. a cyclical beta is positive in good economies and negative in bad economies. D. the beta of the HML portfolio is positive in good economies and negative in bad economies. E. a countercyclical beta and the beta of the HML portfolio are negative in good economies and positive in bad economies.

Q: Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML) A. seem like statistical flukes. B. seem to predict GDP growth. C. may be proxies for business cycle risk. D. seem to predict GDP growth and may be proxies for business cycle risk. E. None of the options are correct.

Q: A major finding by Heaton and Lucas (2000) is that A. the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected. B. the market rate of return does explain the rate of return of individual securities. C. the change in proprietary wealth helps explain the rate of return of individual securities. D. the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected, but the change in proprietary wealth helps explain the rate of return of individual securities. E. None of the options are correct.

Q: Jagannathan and Wang (2006) find that the CCAPM explains returns ______ the Fama French three factor model, and that the Fama French three factor model explains returns ______ the traditional CAPM. A. worse than; worse than B. worse than; better than C. better than; better than D. better than; worse than E. equally as well as; equally as well as

Q: The Fama and French three factor model does not use ___ as one of the explanatory factors. A. industrial production B. inflation C. firm size D. book to market ratio E. industrial production or inflation

Q: The Fama and French three factor model uses ___, ___, and ___ as factors. A. industrial production; term spread; default spread B. industrial production; inflation; default spread C. firm size; book to market ratio; market index D. firm size; book to market ratio; default spread E. None of the options are correct.

Q: Which of the following must be done to test the multifactor CAPM or the APT? I) Specify the risk factors II) Identify portfolios that hedge the risk factors III) Test the explanatory power of hedge portfolios IV) Test the risk premiums of hedge portfolios A. I and II B. II and IV C. II and III D. I, II, and IV E. I, II, III, and IV

Q: Tests of the CAPM that use regression techniques are subject to inaccuracies because A. the statistical results used are almost always incorrect. B. the slope coefficient of the regression equation is biased downward. C. the slope coefficient of the regression equation is biased upward. D. the intercept of the regression equation is biased downward. E. the intercept of the regression equation is equal to the risk free rate.

Q: Equity premium puzzle studies may be subject to survivorship bias because A. the time period covered was not long enough. B. an inappropriate index was used. C. the indexes used did not exist for the whole period of the study. D. both U.S. and foreign data were used. E. only U.S. data was used.

Q: Which of the following is a (are) result(s) of the Fama and French (2002) study of the equity premium puzzle? I) Average realized returns during 1950 1999 exceeded the internal rate of return (IRR) for corporate investments. II) The statistical precision of average historical returns is far higher than the precision of estimates from the dividend discount model (DDM). III) The reward to variability ratio (Sharpe) derived from the DDM is far more stable than that derived from realized returns. IV) There is no difference between DDM estimates and actual returns with regard to IRR, statistical precision, or the Sharpe measure. A. I, II, and III B. I and III C. I and II D. II and III E. IV

Q: Fama and French (2002) studied the equity premium puzzle by breaking their sample into subperiods and found that A. the equity premium was largest throughout the entire 1872 1999 period. B. the equity premium was largest during the 1872 1949 subperiod. C. the equity premium was largest during the 1950 1999 subperiod. D. the differences in equity premiums for the three time periods were statistically insignificant. E. the constant growth dividend discount model never works.

Q: A study by Mehra and Prescott (1985) found that historical average excess returns A. have been too small to be consistent with rational security pricing. B. have been too large to be consistent with rational security pricing. C. have been too small to be consistent with fractional security pricing. D. prove CAPM is incorrect. E. prove the market is efficient.

Q: Which of the following statements is false about models that attempt to measure the empirical performance of the CAPM? I) The conventional CAPM works better than the conditional CAPM with human capital. II) The conventional CAPM works about the same as the conditional CAPM with human capital. III) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM. A. I only B. II only C. III only D. I and II E. II and III

Q: Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM? A. The conventional CAPM works better than the conditional CAPM with human capital. B. The conventional CAPM works about the same as the conditional CAPM with human capital. C. The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM. D. Adding firm size to the model specification dramatically improves the fit. E. Adding firm size to the model specification worsens the fit.

Q: Fama and French (1992) found that A. firm size had better explanatory power than beta in describing portfolio returns. B. beta had better explanatory power than firm size in describing portfolio returns. C. beta had better explanatory power than book to market ratios in describing portfolio returns. D. macroeconomic factors had better explanatory power than beta in describing portfolio returns. E. None of the options are correct.

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.