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FINC510 Final Exam

A final exam assessing financial analysis and investment strategies.

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    FINC510 FINAL EXAM 1. Which of the following statements is CORRECT? a. Time lines are useful for visualizing complex problems prior to doing actual calculations. b. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods c. A time line is not meaningful unless all cash flows occur annually. d. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. e. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 2. Which of the following statements is CORRECT? a. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. b. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. c. A time line is not meaningful unless all cash flows occur annually. d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. e. Time lines are not useful for visualizing complex problems prior to doing actual calculations. 3. Which of the following statements is CORRECT? a. Time lines are not useful for visualizing complex problems prior to doing actual calculations. b. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. d. A time line is not meaningful unless all cash flows occur annually. e. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 4. Which of the following statements is CORRECT?

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    a. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. b. Time lines are not useful for visualizing complex problems prior to doing actual calculations. c. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. d. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. e. A time line is not meaningful unless all cash flows occur annually. 5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? a. The discount rate decreases. b. The discount rate increases. c. The riskiness of the investment's cash flows increases. d. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 6. Assume that inflation is expected to decline steadily in the future, but that the real risk - free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? a. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. b. If inflation is expected to decline, there can be no maturity risk premium. c. If the pure expectations theory holds, the corporate yield curve must be downward sloping. d. If the pure expectations theory holds, the Treasury yield curve must be downward sloping. e. The expectations theory cannot hold if inflation is decreasing. 7. Which of the following statements is CORRECT, other things held constant? a. If companies have fewer good investment opportunities, interest rates are likely to increase. b. If expected inflation increases, interest rates are likely to increase.

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    c. Interest rates on long - term bonds are more volatile than rates on short - term debt securities like T - bills. d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. e. If individuals increase their savings rate, interest rates are likely to increase. 8. Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. The Federal Reserve decides to try to stimulate the economy. b. The economy moves from a boom to a recession. c. The level of inflation begins to decline. d. Households start saving a larger percentage of their income. e. Corporations step up their expansion plans and thus increase their demand for capital. 9. If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10 - year Treasury coupon bond compare to that on a 1 - year T - bill? a. The yields on the two securities would be equal. b. It is impossible to tell without knowing the coupon rates of the bonds. c. The yield on a 10 - year bond would be less than that on a 1 - year bill. d. The yield on a 10 - year bond would have to be higher than that on a 1 - year bill because of the maturity risk premium. e. It is impossible to tell without knowing the relative risks of the two securities. 10. Which of the following statements is CORRECT? a. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. b. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. c. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping. d. Because long - term bonds are riskier than short - term bonds, yields on long - term Treasury bonds will always be higher than yields on short - term T - bonds. e. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat. 11. Which of the following statements is CORRECT?

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    a. You hold two bonds, a 10 - year, zero coupon, issue and a 10 - year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. b. You hold two bonds. One is a 10 - year, zero coupon, bond and the other is a 10 - year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. c. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. d. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. 12. Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company's financial situation deteriorates significantly. b. Market interest rates decline sharply. c. The company's bonds are downgraded. d. Market interest rates rise sharply. e. Inflation increases significantly. 13. Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par? a. Adding additional restrictive covenants that limit management's actions. b. Adding a call provision.. c. Making the bond a first mortgage bond rather than a debenture. d. The rating agencies change the bond's rating from Baa to Aaa. e. Adding a sinking fund. 14. Which of the following statements is CORRECT? a. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

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    b. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. c. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. d. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. e. A sinking fund provision makes a bond more risky to investors at the time of issuance. 15. Amram Inc. can issue a 20 - year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20 - year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, theconvertible, callable bond with the sinking fund, to have it sell initially at par? a. The rate should be over 7%. b. The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%. c. The rate should be over 8%. d. The rate should be slightly greater than 6%. e. The coupon rate should be exactly equal to 6%. 16. You have the following data on three stocks: Stock Standard Deviation Beta A 20% 0.59 B 10% 0.61 C 12% 1.29 If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well - diversified portfolio. a. C; B. b. A; A.

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