A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures. . A. premium; gains B. discount; gains C. premium; losses D. discount; losses 3 points    QUESTION 2 Given two comparable bonds A and B with par values of $1000. Both bonds mature in twenty years. Bond A has a coupon rate of 15%. Bond B has a coupon rate of 9%. Which bond has the greater interest rate risk? . A. Bond A B. Bond B 3 points    QUESTION 3 Davy Crockett, Inc. has an 8 percent coupon bond that matures in 8 years. The bond pays interest semiannually. What is the market price of the $1,000 face value bond if the yield to maturity is 10%? . A. $891.62 B. $780.86 C. $881.18 D. $679.90 E. $600.34 3 points    QUESTION 4 If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will _____. . A. discount; decrease this discount. B. discount; increase this discount. C. premium; decrease this premium. D. premium; increase this premium. E. None of the above. 3 points    QUESTION 5 The lowest Moody’s bond rating category considered to be of investment grade quality is: . A. A B. Ba C. Baa D. B E. Caa 3 points    QUESTION 6 Given a bond with 8 years to maturity, $1000 face value, 8% coupon, 9% yield to maturity. The bond pays an annual coupon. What is the Duration of the bond? . A. 7.20 Years B. 7.20 Percent C. 6.58 Percent D. 6.58 Years E. 6.10 Percent F. 6.10 Years 3 points    QUESTION 7 A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity? . A. 7.24% B. 7.79% C. 8.04% D. 8.12% E. 8.54% 3 points    QUESTION 8 The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rate of return is 15%? . A. $17.04 B. $22.39 C. $26.57 D. $29.08 E. $33.71 3 points    QUESTION 9 Skeezix Corporation just paid a $2.35 annual dividend. Analysts expect dividends at Skeezix to grow at a rate of 6% for the next 5 years, slow down to a rate 4% for the following 5 years, and settle on a steady growth of 2.5% thereafter. The appropriate cost of capital given the risk of Skeezix’s common stock is 13%. What the price per share of Skeezix Corporation’s common stock? . $27.44 $26.05 $27.32 $26.88 $25.42 3 points    QUESTION 10 The average compound return earned per year over a multi-year period is called the _____ average return. . A. arithmetic B. standard C. variant D. geometric E. real 3 points   .

1. A bond with an annual coupon of $70 and originally sold at par
for $1,000. The current market interest rate (yield to maturity)
is 8%. This bond will sell at _______. Assuming no change in
market interest rates, the bond will present the holder with
capital ________ as it matures.
.
A.
premium; gains
B.
discount; gains
C.
premium; losses
D.
discount; losses
3 points
QUESTION 2
Given two comparable bonds A and B with par values of $1000.
Both bonds mature in twenty years. Bond A has a coupon rate of
15%. Bond B has a coupon rate of 9%. Which bond has the
greater interest rate risk?
.
A.
Bond A
B.
Bond B
3 points
QUESTION 3
Davy Crockett, Inc. has an 8 percent coupon bond that matures

2. in 8 years. The bond pays interest semiannually. What is the
market price of the $1,000 face value bond if the yield to
maturity is 10%?
.
A.
$891.62
B.
$780.86
C.
$881.18
D.
$679.90
E.
$600.34
3 points
QUESTION 4
If its yield to maturity is less than its coupon rate, a bond will
sell at a _____, and increases in market interest rates will
_____.
.
A.
discount; decrease this discount.
B.
discount; increase this discount.
C.
premium; decrease this premium.
D.

3. premium; increase this premium.
E.
None of the above.
3 points
QUESTION 5
The lowest Moody’s bond rating category considered to be of
investment grade quality is:
.
A.
A
B.
Ba
C.
Baa
D.
B
E.
Caa
3 points
QUESTION 6
Given a bond with 8 years to maturity, $1000 face value, 8%
coupon, 9% yield to maturity. The bond pays an annual coupon.
What is the Duration of the bond?
.
A.
7.20 Years
B.
7.20 Percent

4. C.
6.58 Percent
D.
6.58 Years
E.
6.10 Percent
F.
6.10 Years
3 points
QUESTION 7
A General Co. bond has an 8% coupon and pays interest
annually. The face value is $1,000 and the current market price
is $1,020.50. The bond matures in 20 years. What is the yield to
maturity?
.
A.
7.24%
B.
7.79%
C.
8.04%
D.
8.12%
E.
8.54%
3 points
QUESTION 8

5. The Extreme Reaches Corp. last paid a $1.50 per share annual
dividend. The company is planning on paying $3.00, $5.00,
$7.50, and $10.00 a share over the next four years, respectively.
After that the dividend will be a constant $2.50 per share per
year. What is the market price of this stock if the market rate of
return is 15%?
.
A.
$17.04
B.
$22.39
C.
$26.57
D.
$29.08
E.
$33.71
3 points
QUESTION 9
Skeezix Corporation just paid a $2.35 annual dividend. Analysts
expect dividends at Skeezix to grow at a rate of 6% for the next
5 years, slow down to a rate 4% for the following 5 years, and
settle on a steady growth of 2.5% thereafter. The appropriate
cost of capital given the risk of Skeezix’s common stock is
13%. What the price per share of Skeezix Corporation’s
common stock?
.
$27.44

6. $26.05
$27.32
$26.88
$25.42
3 points
QUESTION 10
The average compound return earned per year over a multi-year
period is called the _____ average return.
.
A.
arithmetic
B.
standard
C.
variant
D.
geometric
E.
real
3 points
QUESTION 11
Over the period of 1926 through 2008, the annual rate of return
on _____ has been more volatile than the annual rate of return
on_____.

7. .
A.
large company stocks; small company stocks
B.
U.S. Treasury bills; small company stocks
C.
U.S. Treasury bills; long-term government bonds
D.
long-term corporate bonds; small company stocks
E.
large company stocks; long-term corporate bonds
3 points
QUESTION 12
Which of the following statements concerning the standard
deviation are correct?
I. The greater the standard deviation, the lower the risk.
II. The standard deviation is a measure of volatility.
III. The higher the standard deviation, the less certain the rate
of return in any one given year.
IV. The higher the standard deviation, the higher the expected
return.
.
A.
I and III only
B.
II, III, and IV only
C.
I, III, and IV only

8. D.
I, II, and III only
E.
I, II, III, and IV
3 points
QUESTION 13
The excess return you earn by moving from a relatively risk-
free investment to a risky investment is called the
.
A.
geometric average return
B.
inflation premium.
C.
risk premium
D.
time premium.
E.
arithmetic average return.
3 points
QUESTION 14
You recently purchased a stock that is expected to earn 12% in
a booming economy, 8% in a normal economy and lose 5% in a
recessionary economy. There is a 15% probability of a boom, a
75% chance of a normal economy, and a 10% chance of a
recession. What is your expected rate of return on this stock?
.
A.

9. 5.00%
B.
6.45%
C.
7.30%
D.
7.85%
E.
8.30%
3 points
QUESTION 15
Risk that affects at most a small number of assets is called
_____ risk.
.
A.
portfolio
B.
undiversifiable
C.
market
D.
unsystematic
E.
total
3 points
QUESTION 16
Which of the following would be considered an example of

10. systematic risk?
.
A.
Apple wins its law suit against Samsung.
B.
Quarterly profit for GM equals expectations.
C.
Lower quarterly sales for IBM than expected.
D.
Greater new jobless claims in the economy than expected.
E.
Fed leaves interest rates unchanged, as expected.
3 points
QUESTION 17
Unsystematic risk:
.
A.
can be effectively eliminated through portfolio diversification.
B.
is compensated for by the risk premium.
C.
is measured by beta.
D.
cannot be avoided if you wish to participate in the financial
markets.
E.

11. All of the above.
3 points
QUESTION 18
The diversification effect of a portfolio of two stocks:
.
A.
increases as the correlation between the stocks declines.
B.
increases as the correlation between the stocks rises.
C.
decreases as the correlation between the stocks rises.
D.
Both A and C.
E.
None of the above.
3 points
QUESTION 19
Irene Adler is considering investing in the common stock of
Holmes and Watson. The following data are available for the
two securities.
.
................... Expected Return ..... Standard Deviation
Holmes .............. 0.12 ......................... 0.08
Watson ............. 0.16 .......................... 0.20
.
If she invests 60% of her funds in Holmes and 40% in Watson,
and if the correlation of returns between these two securities is
0.45, what is the portfolio’s expected return and standard
deviation?
.

12. A.
14.4% and 13.70%
B.
13.6% and 11.03%
C.
13.6% and 13.70%
D.
14.4% and 11.03%
E.
None of the above.
3 points
QUESTION 20
What does a security bring to the risk of a well diversified
portfolio?
.
A.
It brings its standard deviation of possible returns.
B.
It brings its covariance with the other securities in the portfolio.
C.
It brings its total risk.
D.
It brings its unsystematic risk.
3 points
QUESTION 21
Diversification can effectively reduce risk. Once a portfolio is
diversified, the type of risk remaining is:
.

13. A.
individual security risk.
B.
riskless security risk.
C.
unsystematic risk
D.
risk related to the market portfolio.
3 points
QUESTION 22
Efficient portfolios are those, which offer:
.
A.
Highest expected return for a given level of risk
B.
Highest risk for a given level of expected return
C.
The maximum risk and expected return
D.
All of the above
3 points
QUESTION 23
A equally weighted portfolio is formed with 4 securities A, B,
C, D. Summary statistics of the securities are listed below.
What is the standard deviation of the portfolio?
.
Variance of A = 493.73
Variance of B = 156.25

14. Variance of C = 1040.06
Variance of D = 400.00
.
Covariance between A and B = 186.09
Covariance between A and C = 394.13
Covariance between A and D = 168.87
Covariance between B and C = 181.41
Covariance between B and D = 167.50
Covariance between C and D = 483.75
.
16.6
24.1
17.7
18.1
19.8
3 points
QUESTION 24
........................ Standard Deviation ........ Beta
Security X .............. 0.35 ........................ 1.45
Security Y ............. 0.28 ......................... 1.06
Security Z ............ 0.44 .......................... 1.22
.
Which of the following is correct?
.
A.

15. Security Z has the greatest total risk because it has the largest
standard deviation.
B.
Security X has the greatest total risk because it has the largest
beta.
C.
Security X has the greatest diversifiable risk because it has the
largest beta.
D.
Security Y has the lowest total risk because it has the lowest
beta.
E.
An equally-weighted portfolio of XYZ will have the same
systematic risk as the market portfolio.
3 points
QUESTION 25
......................... Standard Deviation ........ Beta
Security X .............. 0.35 ........................ 1.45
Security Y .............. 0.28 ........................ 1.06
Security Z .............. 0.44 ......................... 1.22
.
Which security has the greatest systematic risk?
.
A.
Z because it has the largest standard deviation.
B.
Z because it has a high beta and the largest standard deviation.
C.
X because it has the largest beta coefficient..

16. D.
Y because it has the greatest diversifiable risk.
E.
It is not possible to tell given the information above.