Question

#16: A bond that can be paid off early by the issuing company is referred to as being which one of the following?

1. Zero coupon
2. Callable
3. Collateralized
4. Senior

#17: The part of total risk that is irrelevant to a well-diversified investor is called:

1. Diversifiable risk
2. Market risk
3. Systematic risk
4. Beta risk

#18: Which one of the following is the y-intercept of the security market line?

1. Beta coefficient
2. Risk-free interest rate
3. Market risk premium
4. Market standard deviation

#19: FIN stock has a beta of 1.5. The risk-free rate of return is 2.5% and the market risk premium is 7.3%. What is the expected rate of return on this stock?

1. 12.53%
2. 9.70%
3. 13.45%
4. 8.58%

#20: FIN’s bonds have a 7.60% coupon and pay interest annually. The bonds mature in 20 years. The face value is $1,000. If the current market price is $1,062.50 per bond, what is the bond’s yield to maturity?

1. 7.01%
2. 7.71%
3. 6.94%
4. 7.46%

#21:

What is the risk as measured in standard deviation of returns on a stock given the following information:

STATE OF ECONOMY	PROBABILITY OF OCCURRENCE	RETURN IF STATE OCCURS
Boom	30%	28%
Normal	60%	8%
Recession	10%	-15%

1. 11.65%
2. 12.62%
3. 12.78%
4. 11.77%

#22:

You have a chance to buy an annuity that pays $500 at the end of each year for 3 years. You could earn 4% on your money in other investments with equal risk. What is the most you should pay for the annuity?

1. $1243.75
2. $1387.55
3. $1212.84
4. $1415.48

#23:

What should be the share price of FIN inc. stock if the company just paid a $0.80 annual dividend, the dividends increase by 1.6% annually, and you require 8% rate of return.

1. $12.70
2. $19.52
3. $13.84
4. $16.68

#24:

You now have $500. How much would you have after 5 years if you leave it invested at 3.5% with annual compounding?

1. $593.84
2. 581.09
3. 689.42
4. 654.95

#25:

FIN inc. just paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 4% per year. The stock is currently selling for $26.91 a share. What is the market rate of return?

1. 15.20%
2. 14.60%
3. 13.88%
4. 14.82%

PLEASE help with calculations and formulas where/if possible. Thank you very much.

Answer 1

16. Callable. A bond that can be paid off early by the issuing company is referred to as Callable Bond

17. Systematic risk. Systematic risk refers to the risk inherent to the entire market or market segment which cannot be easily Un diversified because of unpredictable nature of market.

18. Risk-free interest rate, y-intercept of the security market line is Risk Free Interest rate

19. Expected Rate of return = Risk Free + Beta * Market Risk Premium = 2.50% +1.50 * 7.30% = 13.45%

20. YTM = 7.01%

21. SD = 12.62%

22. You should pay for the annuity = Annuity * PVAF(4%,3)

present Value of the annuity = 500 * 2.7751 (Please refer annuity table 4% at 3 years)

present Value of the annuity = $1387.55

23. Share Price = Dividend * (1 + Growth) / (Cost - Growth rate)

Share Price = 0.80 * (1 + 1.60%) / (8% - 1.60%)

Share Price = 0.8128 / 6.40%

Share Price = $12.70

24. Future Value = Present Value * (1 + rate)^5

Future Value = 500 * (1 + 0.035)^5

Future Value = 500 * 1.1876 = $593.84

25. Market rate = [Annual Dividend * (1 + Growth rate) / Shares Price] + Growth rate

Market rate = [2.80 * (1 + 0.04) / 26.91] + 0.04

Market rate = 0.1082 + 0.04 = 14.82%

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