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Finance 480 > Exam 1 > Flashcards

Exam 1 Flashcards

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1
Q

Gold would be a superior commodity money compared to wheat because:

a) wheat has a low value related relative to weight, which gold does not
b) it is easier to divide wheat into small units
c) wheat has more practical use than gold
d) wheat is perishable

A

d) wheat is perishable

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2
Q

During a so-called flight to safety the yield on us treasuries tends to ____ while the price of US treasuries tends to ____

A

decrease, increase

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3
Q

In general, the _____ bond rating, the _____ the risk of default.

A

higher/lower, lower/higher

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4
Q

The current yield on a 5-year us treasury bond is 2.57%. the current yield on a 5-year corporate bond is 4.62%. What is the risk premium?

A

2.05%

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5
Q

Which of the following statements is true?

A. Leverage increases expected return and increases risk.
B. Leverage increases expected return but has no effect on risk.
C. Leverage decreases expected return and increases risk.
D. Leverage has no effect on expected return but increases risk.

A

A. Leverage increases expected return and increases risk

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6
Q

The current price of a $1,000 face value zero coupon bond is $935. What is the implied interest rate?

A

6.95%

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7
Q

Which of the following will decrease the npv of a project?

A. A decrease in the discount rate
B. Decreasing the amount of initial cash invested
C. Increasing the final period cash flow
D. having all future cash flows occur in the first year vs evenly spaced over 5 years
E. All would increase npv

A

e. all would increase the npv

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8
Q

If the quantity of fun is demanded is less than the quantity of bonds supplied, bond yields:

A. Would rise in prices would decrease
B. Would fall in the prices would decrease
C. Will rise in prices will increase

A

a. Would rise in prices would decrease.

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9
Q

A $1,000 face value bond purchased for $975,000, with an annual coupon rate of $50, and 20 years to maturity has a:

A. Current yield equal to 5.13%
B. Current yield equal to 6.22%
C. Coupon rate equal to 6%
D. Coupon rate equal to 5.13% 
E. Both A and D
A

a. Current yield equal to 5.13%.

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10
Q

A 1 year bond has a ____ than a 20-year bond, and ____ then a 10-year bond.

A. more interest rate risk, more inflation risk
B. less interest rate risk, less interest rate risk
C. less interest rate risk, more inflation risk
D. Moore inflation risk, less inflation risk
E. None of the above

A

B. Less interest rate risk, less interest rate risk

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11
Q

If a bond is upgraded, we would expect the price to ____ in the yield to _____.

A. Rise, fall
B. Fall, rise
C. Rise, rise
D. Fall, fall

A

a. Rise, fall

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12
Q

If a bond is downgraded, we would expect its risk premium to blank and its yield to blank.

A. Rise, rise
B. Fall, fall
C. Rise, fall
D. fall, rise

A

a. Rise, rise

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13
Q

You borrow $950 for one year at 3% to buy a one year zero coupon bond with a face value of $1,000 for $950. What is your profit on this investment?

A. $21.50
B. $22.50
C. $25
D. $50

A

a. $21.50

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14
Q

A zero coupon bond (face value = $1,000) is trading today for $975. In the event of a default, the bond issuer is expected to pay $400. What is your value at risk if you buy this bond today?

A

575

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15
Q

You buy a bond today for $100. Tomorrow, someone comes along and offers to purchase the bond for $95. What does this imply about their risk premium relative to your premium? If the bond has a $5 coupon what is someone’s yield?

A. Lower, 5%
B. Higher, 5%
C. Lower, 5.55%
D. Higher, 5.26%

A

D. Higher, 5.26%

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16
Q

Suppose the current one year yield is 1% and the estimated 1 year yields for the next couple years are 2%, 3% and 4%. The expectations hypothesis suggests the yield on four-year bonds today is

A. 1% 
B. 2% 
C. 2.5% 
D. 3% 
E. None of the above
A

C. 2.5%

17
Q

Supposed to current 1 year yield is 1% and the estimated 1 year yields for the next couple years are 2%, 3% and 4%. The expectations hypothesis suggests that

A. The yield curve is upward sloping today
B. The yield curve will be upward-sloping next year
C. The old curve is downward sloping today
D. The yield curve will be done with sloping next year
E. Both A and B are correct

A

e. Both A and B are correct

18
Q

ABC Incorporated issues $1,000 face value zero coupon 1 year bonds. The current return on one year zero coupon US government bonds is 3.5%. If the ABC bonds are selling for $935, what is the risk premium for these bonds?

a. 3.25%
b. 3.45%
c. 3.5%
d. 6.95%
e. None of the above

A

B. 3.45%

19
Q

An investment with a small spread between potential payoffs will have a

A. High variance 
B. high standard deviation 
C. Low standard deviation 
D. Low expected return 
E. Both C and D are correct
A

C. Low standard deviation

20
Q

You have a choice of investing in stock A (return equal negative 4% with a probability of 30% and return equal 12% with a probability of 70%) or investing in a portfolio that consists of equal amounts of A, B, C, D (each with the same expected return but zero correlation between the stocks). If you choose to invest in portfolio ABCD on average you will receive ____ with a ____ standard deviation of returns relative to investing in just A.

A. 9.6%, larger 
B. 4%, larger 
C. 9.6%, smaller 
D. 7.2%, smaller 
E. None of the above
A

D. 7.2%, smaller

21
Q

The probability of a bond defaulting has decreased. In general

A. The risk premium will increase 
B. The price will increase 
C. The old will increase 
D. The yield will decrease 
E. Both B and D are correct
A

e. Both B and D are correct

22
Q

Suppose a bond earns interest that exactly equals the inflation rate. The bond would not be considered money because

A. It is not a store of value 
B. It is not a unit of account 
C. It is not a means of payment 
D. Both B and C are correct
E. All of the above
A

D. Both B and C are correct

23
Q

A debt covenant is designed to limit risk-taking by borrowers, this is an attempt to solve

A. a moral hazard problem
B. An adverse selection problem
C. A principal-agent problem
D. an access to capital problem

A

a. A moral hazard problem

24
Q

You have a choice of investing $1,000 in stock A (return equals 4% with a probability of 30% and return equal to 12% with probability of 70%) or borrowing $1,000 and investing a total of $2,000 in stock A. Your possible payoffs without leverage are ____. Your possible payoff after loan payments are ____.

A

$960 and $1,120, $920 and $1,240

25
Q

A risky investment has a rate of return

A. Equal to zero
B. With a variance equal to zero
C. That exhibits a small spread of potential payoffs
D. That exhibits a large spread of potential payoffs

A

D. Has a large spread of potential payoffs.

Finance 480 (7 decks)

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