Q&A Hero

Q: Business risk is influenced by all the following factors except: a. variability in interest expenses b. variability in sales c. diversity of its product line d. choice of production technology

Q: Investors generally are considered to be risk ____ because they expect to be compensated for assuming risk. a. adverse b. seekers c. averse d. takers

Q: In the ____, the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return. a. Arbitrage Pricing Theory b. Capital Asset Pricing Model c. Dividend Valuation Model d. Risk premium on debt model

Q: Arbitrage pricing theory is a model that relates expected returns on securities to a. security risk and yield spreads b. yield spreads and yield curve slope c. anticipated economic factors d. multiple risk factors

Q: The risk premium for an individual security is equal to the a. beta times the market return b. difference between the required return and the risk free rate c. weighted average of the individual security betas in a portfolio d. the security's covariance divided by the variance of the market

Q: Texas Computers (TC) stock has a beta of 1.5 and American Water (AW) stock has a beta of 0.5. Which of the following statements will be true about these securities? a. The addition of TC would reduce portfolio risk more than the addition of AW. b. The addition of AW would reduce total portfolio risk more than the addition of TC. c. The required return for TC is greater than the required return for AW. d. The required return for AW is greater than the required return of TC.

Q: The most relevant risk that must be considered for any widely traded individual security is its ____. a. unsystematic risk b. standard deviation c. covariance risk d. systematic risk

Q: The risk remaining after extensive diversification is primarily: a. unsystematic risk b. systematic risk c. coefficient of variation risk d. standard deviation risk

Q: All of the following factors have their primary impact on unsystematic risk except a. availability of raw materials b. effects of foreign competition c. changes in inflation d. strikes

Q: All of the following are primary sources of systematic risk except a. changes in the amount of foreign competition facing an industry b. changes in investor expectations about the economy c. interest rate changes d. interest rate changes and investor expectations

Q: The security market line can be thought of as expressing relationships between required rates of return and a. the time value of money b. beta c. total risk d. portfolio diversification

Q: A beta value of 0.5 for a security indicates a. the security has average systematic risk b. the security has above-average systematic risk c. the security has no unsystematic risk d. the security has below-average systematic risk

Q: Beta is defined as: a. a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities. b. the ratio of the variance of market returns to the covariance of returns on a security with the market c. the inverse of the slope of the security regression line d. all of these answers are correct

Q: All other things being equal, what is the major impact that an increase in the expected inflation rate would be expected to have on the security market line? a. reduce its slope b. shift it down and to the right c. shift it up and to the left d. reduce required returns for investors in any individual asset

Q: The security market line a. is defined as the slope of a line relating an individual security's return to the returns of other securities in that firm's primary industry. b. provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets. c. has as its slope the beta of the security d. none of these answers are correct.

Q: Which of the following is notan example of a source of systematic risk? a. interest rate changes b. foreign competition with an industry's products c. changes in the overall economic outlook d. changes in the inflation rate

Q: Security A's expected return is 10 percent while the expected return of B is 14 percent. The standard deviation of A's returns is 5 percent, and it is 9 percent for B. An investor plans to invest equal amounts in A and B. Which of the following statements is true about this portfolio consisting of stock A and stock B. a. The risk of the portfolio is equal to 7 percent. b. The lower the correlation of returns between the two stocks, the higher the portfolio's risk. c. The risk of the portfolio is primarilydependent on the utility function of the investor. d. The higher the correlation of returns between the two stocks, the higher the portfolio's risk.

Q: The ____ of a portfolio of two or more securities is equal to the weighted average of the ____ of each of the individual securities in the portfolio. a. standard deviation, standard deviation b. risk, risk c. expected return, expected return d. all of these answers apply

Q: The returns from most common stocks are a. positively correlated with each other b. negatively correlated with each other c. uncorrelated with each other d. none of these are correct

Q: The slope of the characteristic line for a specific security is an estimate of ____ for that security. a. beta b. systematic risk c. total risk d. both beta and systematic risk

Q: The ____ the standard deviation, the ____ the investment. a. smaller, larger the expected return on b. larger, riskier c. smaller, riskier d. larger, smaller the expected return on

Q: The ____ is a statistical measure of the mean or average value of the possible outcomes. a. probability distribution b. standard deviation c. expected value d. coefficient of variation

Q: Name some areas of finance where it is important to understand and utilize the concept of time value of money.

Q: Out-of-Breath Exercise Equipment Co. is selling a treadmill for a cash price of $2,500. They will finance the purchase and require a monthly payment of $95 per month for three years at an interest rate of 6%. How much would your treadmill cost you if it were financed (rounded answer)?a. $3,737b. $2,875c. $3,123d. $4,176

Q: By-Your-Leave Travel Agency is offering an all-expense trip to Issinonni Resort for $12,000. You decide to start saving each month for this trip which you plan to take in 4 years. If you earn 5% interest on your money, how much do you need to save monthly to pay for this trip (rounded answer)? a. $350 b. $175 c. $226 d. $415

Q: When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment? a. $153.33 b. $662.08 c. $584.12 d. $559.78

Q: When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you?a. 9.82%b. 5.00%c. 25.39%d. 10.00%

Q: Inco purchased a computer for $200,000 and this machine is expected to generate annual cash flows of $48,271 over the next 5 years. What is the expected rate of return on this investment?a. 8.84%b. 26.58%c. 6.61%d. none of these are correct

Q: Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is your monthly payment? a. $917.77 b. $895.71 c. $666.67 d. $878.14

Q: What is the value in 10 years of $10,000 deposited in an account earning 8% compounded monthly? a. $33,004 b. $22,285 c. $102,530 d. $21,589

Q: If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (age 16,17,18, and 19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year? (Assume end-of-year payments.) a. $1,569,758 b. $68,613 c. $3,457,169 d. $1,148,958

Q: If a 16-year-old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20 - 65) at 9%. a. $442,001 b. $386,616 c. $1,767,995 d. $9,146

Q: Al Corbin is 25 years old today and he wishes to accumulate enough money over the next 35 years to provide for a 20-year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday. He can save $2,000 at the end of each of the next 10 years and $3,000 each year for the following 10 years. How much must he save each year at the end of years 21 through 35 to obtain his goal? Assume that the average rate of return over the entire period will be 10%. a. $9,642 b. $26,969 c. $12,321 d. $24,289

Q: Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter? a. $12,107 b. $11,465 c. $9,901 d. $14,727

Q: What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded monthly? a. $842 b. $914 c. $833 d. $836

Q: What monthly rate of interest will yield an annual effective rate of interest of 14%? a. 1.17% b. 1.10% c. 1.08% d. 1.14%

Q: Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card? a. 18.00% b. 18.64% c. 19.56% d. 29.74%

Q: 1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you? a. 10.38% b. 10.42% c. 10.45% d. 10.47%

Q: Keith Stone has a 10-year-old daughter, Kate, who will be entering college in 8 years. Keith estimates college costs to be $16,000, $17,000, $18,000 and $19,000 payable at the beginning of each of Kate's four years in college. How much must Keith save each year (assume end of year payments) for each of the next 8 years to have enough savings to pay for Kate's education? Assume Keith can earn 9% on his savings.a. $5,569b. $7,720c. $5,108d. $7,677

Q: The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for a new air conditioning system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both principal and interest on the outstanding balance. What will be the outstanding balance after the third payment? a. $60,000 b. $20,865 c. $45,788 d. $50,866

Q: What is the present value of the following net cash flows if the discount rate is 10%?Year Net Cash Flow1-10 $20,000 each year11-15 $15,000 each year16-20 $10,000 each yeara. $217,675b. $153,895c. $322,130d. $167,515

Q: You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85). You are now 40 years old. How much must you save each year for the next 25 years if you assume your savings will earn 12% annually? a. $ 560.17 b. $1,499.99 c. $5,403.87 d. $1,333

Q: If the discount rate is 12%, what is the present value of the following cash flows:Year Cash Flow 1 $10,000 2 $11,000 3 $12,000 4 $13,000 5 $14,0006-15 $15,000 each yeara. $144,618b. $127,923c. $127,197d. $ 90, 537

Q: What is the present value of the following net cash flows if the discount rate is 12%:Year Cash Flow1-5 $10,000 each year6-10 $15,000 each year11-15 $17,000 each yeara. $151,400b. $ 86,462c. $144,037d. $ 79,252

Q: You plan to lease a Saab automobile that sells for $22,657 and has no salvage value. If the monthly lease is $499, with the first of 60 payments due immediately. What is the implied annual interest rate on your lease? a. 10% b. 11.5% c. 12% d. 10.5%

Q: You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund earns about 11 percent per year and that is where you put your savings. How much must you save each year to obtain your goal? a. $20,000.00 b. $ 3,749.98 c. $ 4,370.13 d. $ 2,000.00

Q: How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an account that is paying a nominal 12 percent per year, compounded monthly? a. $16,334 b. $15,247 c. $16,497 d. $15,817

Q: Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that is compounded annually. a. $6,050 b. $0 c. $310 d. $220

Q: Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20 year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?a. $16,000b. $19,046c. $1,120d. $944.10

Q: A zero coupon bond with a $1,000 par value is selling for $356 and matures in 12 years. What is the implied discount rate (yield to maturity)? a. 9% b. 9.36% c. 9.12% d. 9.4%

Q: You just purchased a new $25,000 car and agreed to pay for the car in 50 monthly payments. If the monthly interest rate is 1 percent, what is your total financing cost?a. $637.82b. $12,500c. $574.25d. $6,891

Q: Jackie plans to open her own book store in 10 years. To raise the "seed" money she has committed $10,000 she now has in a mutual fund. In addition, she plans to save $2,000 per year (end of year) for the next 5 years and $3,000 per year (end of year) for the following 5 years. How much "seed" money will Jackie have in 10 years if the investments earn 10 percent per year compounded annually? a. $76,129 b. $63,925 c. $44,255 d. $159,370

Q: California Life has just offered you a single premium annuity for $5,000 that will pay $5,144.12 per year for 20 years, the first payment being received exactly 31 years from today. What is the implied rate of return on this annuity? a. 7% b. 8% c. 9% d. None of these are correct

Q: Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old. If the fund earns 10 percent interest compounded annually, what is the value of the fund today? a. $104,602 b. $6,575 c. $5,975 d. $6,875

Q: John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he pay? a. $7,173.90 b. $2,717.39 c. $12,000.00 d. $25,924.23

Q: Seebee makes quarterly (end of period) payments of $30,000 into a pension fund earning 12 percent per year compounded quarterly for 10 years. How much interest will they have earned in 10 years? a. $2,262,030 b. $2,105,880 c. $905,880 d. $1,062,030

Q: What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent? Year 1 $5,000 Year 2 $8,000 Year 3 $12,000 Year 4-10 $15,000 a. $58,580 b. $104,135 c. $68,105 d. none of the above

Q: You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was your rate of return on your investment? a. 12% b. 11% c. 10% d. 9%

Q: Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%. a. $153,900 b. $ 68,100 c. $ 65,000 d. $ 70,800

Q: If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years? a. $909,090 b. $930,510 c. $783,879 d. $510,285

Q: Sales for Triad Inc. have grown from $2 million to $8.092 million in 10 years. What is the implied growth rate of sales for Triad?a. 24.72%b. 4.05%c. 15.0%d. 12.2%

Q: A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar). a. $2,000 b. $3,100 c. $2,706 d. $1,100

Q: Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer? a. less than 1% b. 15% c. 18% d. 12%

Q: John is 25 years old and wishes to retire in 30 years. His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55. How much must he invest at the end of each year to achieve this goal? a. $7,499.96 b. $5,024.60 c. $4,143.65 d. $33,333.33

Q: What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly? a. 9.92% b. 9.74% c. 10.02% d. 9.86%

Q: What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years? a. $17,623.42 b. $18,170 c. $16,105.10 d. $16,122.26

Q: In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years? a. $29,744.65 b. $29,783.76 c. $17,878.80 d. $21,651.10

Q: Designs Now is opening a showcase office to display and sell it's computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash flows? a. $429,720 b. $457,620 c. $456,000 d. $424,820

Q: Alabama Power has preferred stock that pays an annual dividend of $9.44. If the security has no maturity, what is it's value to an investor who wishes to obtain a 9 percent rate of return? a. $84.96 b. $104.89 c. $95.34 d. $94.40

Q: The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments? a. $130,872 b. $149,194 c. $142,710 d. $264,000

Q: Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning of the year payments that will fully amortize the cost of the car. What is the amount of the payments if the interest rate is 12 percent? a. $6,810.99 b. $7,766.99 c. $6,423.74 d. $6,081.25

Q: Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging? a. 14% b. 23% c. 12.6% d. cannot be determined from the information given

Q: Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end of the year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments? a. $5,548 b. $3,148.12 c. $6,000 d. $1,666.67

Q: New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return? a. 8% b. 9% c. 7% d. 10%

Q: An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity? a. $429,600 b. $438,144 c. $408,672 d. none of these are correct

Q: Many IRA funds argue that investors should invest at the beginning of the year rather than at the end. What is the difference to an investor who invests $2,000 per year at 11 percent over a 30-year period? a. $43,785 b. $36,189 c. $54,244 d. There is no difference

Q: Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000? a. $25,116 b. $3,115 c. $10,000 d. $3,492

Q: Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire. What will Billy have if the account will earn 10 percent compounded annually? a. $394,786 b. $ 23,470 c. $1,062,223 d. $810,917

Q: The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent? a. $2.28 million b. $12.79 million c. $14.32 million d. $5.00 million

Q: BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate is the bank charging you? a. 10% b. 11% c. 12% d. 13%