Question

1. How much would $10 invested today, growing at 13.7% per year, be worth at the end of 75 years (rounded to the nearest $)?

A. $176,205

B. $152,067

C. $151,359

D. $133,534

E. $183,704

2. The risk that interest rates will increase and lead to a decline in the prices of outstanding bonds is called "reinvestment rate risk."

A. True

B. False

3. An organization that underwrites and distributes new investment securities and helps businesses obtain financing is a ________.

A. money market fund

B. private placement

C. investment bank

D. mutual fund

E. derivative

4. A company's stock has a beta of 1.39, the risk-free rate is 2.75%, and the market risk premium is 4.75%. What is the company’s required rate of return based on the capital asset pricing model (CAPM)? Do not round your intermediate calculations.

A. 9.29%

B. 9.35%

C. 10.96%

D. 8.55%

E. 11.52%

Answer 1

1. The correct answer is B. $152,067

FV = PV(1+r)ⁿ

FV = 10 ( 1 + 0.137)⁷⁵

Solving this we get,

FV = $152,067 (approx)

2. The answer is False.

As the The risk that interest rates will increase and lead to a decline in the prices of outstanding bonds is called Interest rate risk or price risk.

Reinvestment risk is the risk that the cash inflow might not earn the same rate as current market rate if they are reinvested in future.

Hence the statement is false.

3. The correct answer is investment banks.

An organization that underwrites and distributes new investment securities and helps businesses obtain financing is a investment bank.

4. The correct answer is B.

CAPM equation -
E(Ri) = Rf + ( E(Rm) - Rf ) * beta of security

where,
E(Ri) = Expected return on security i
rf = risk free return
E(Rm) = Expected market return

E(Rm) - Rf ) is nothing but market risk premium.

Expected return = 2.75 + 4.75 * 1.39

= 9.3525 %

Hope it helps !