WorksheetsFinance
Total questions: 84
Worksheet time: 52mins
We considered different types (legal forms) of firms. Which statement on legal form is TRUE?
A limited partnership is a limited Liability Company (LLC) without a general partner.
In a sole proprietorship there is no separation between ownership and control.
Sole proprietorships generate the largest fraction of total revenue in the US economy.
Corporations are the most common firm type in the US.
A firm issued a bond with 10 years until maturity, a face value of $1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?
$1,084
$1,074
$1,068
$1,038
Which of the following statements related to a corporation’s objectives is FALSE?
The agency problem for corporations implies that the objectives of the shareholders and the corporate manager do not necessarily coincide.
Even if the corporation only makes its shareholders better off, as long as nobody else is made worse off by its decisions, increasing the shareholder value is good for society.
Nowadays, corporations increasingly care about environmental, social and governance objectives provided these do not harm shareholder value.
Maximizing shareholder value constitutes the sole objective of a corporate manager.
Consider two simultaneously issued bonds: a 30-year coupon bond and a 30-year zero-coupon bond with common face value of $1,000. The coupon bond’s (annual) coupon rate is 5%. Moreover, assume both bonds always exhibit the same yield to maturity. Their current yield to maturity is 4%. Which statement is FALSE?
The 30-year coupon bond exhibits more interest rate risk than the 30-year zero-coupon bond.
The coupon bond trades at a premium and the zero-coupon bond trades at a discount
The price of the coupon bond exceeds the price of the zero-coupon bond.
The coupon bond will trade at a discount in the future provided the yield to maturity exceeds 5%.
Consider portfolios consisting of two stocks only. The stock with the highest expected return also exhibits the highest standard deviation. We are interested in plotting the expected portfolio return (vertical axis) against the portfolio standard deviation (horizontal axis) for each possible portfolio. Which statement about 2-stock portfolios is FALSE?
A two-stock portfolio that earns on average the risk free rate exists when the correlation is -1.
The expected portfolio return does not depend on the correlation between the returns.
The portfolio variance depends on the correlation between the returns
The higher the correlation for a given pair of stocks, the lower will be the portfolio standard deviation given the expected portfolio return.
Assume investors only trade on public information that is easy to interpret. Which of the following statements related to the processing of information in market prices and the efficient markets hypothesis is FALSE?
Corporate managers cannot systematically issue undervalued stocks to investors.
A positive Net Present Value of a financial investment can only exist for a short period of time.
Because of arbitrage stocks cannot exhibit different risk in equilibrium: the riskiest stocks will be sold and the safest stocks will be bought.
Corporate managers cannot fool the market by changing accounting rules.
Which statement on the Net Present Value investment rule, Internal Rate of Return (IRR) and the IRR investment rule is TRUE?
When the IRR investment rule contradicts the NPV investment rule, investment decisions should be based on the IRR investment rule.
The NPV investment rule to evaluate a stand-alone project can only be used if all the project’s negative cash flows precede its positive cash flows.
A project with a lifetime of 3 years can exhibit more than 3 IRR’s.
A necessary (but insufficient) condition for the IRR investment rule to lead to the right investment decisions is that the project under consideration only exhibits one single IRR.
We considered various ways to value company equity. Which of the following statements is FALSE?
The more cash the firm uses to repurchase shares, the less it has available to pay dividends.
The total payout model uses the cost of equity capital as relevant discount rate to calculate the present value of the corporation’s future cash flows.
The discounted free cash flow Model is typically applied when there is both equity and debt in the corporation’s balance sheet.
The model of constant dividend growth is a growing annuity.
Which statement related to financial statement analysis or ratio analysis is TRUE?
The book value of equity is equal to the number of shares outstanding times the market price per share.
In order to calculate a company’s enterprise value, it suffices to use information from the company’s balance sheet.
The expertise of the firm’s employees, the firm’s reputation in the marketplace or the quality of the management team are examples of the firm’s tangible assets.
Value stocks typically exhibit lower market-to-book ratios than growth stocks.
You are about to finally book a post-corona holiday to Australia in August and have two options to pay for it. You can immediately pay €4,600 in cash to the travel agency, or you can get a travel loan that requires you to pay €100 each month for the next 4 years. Suppose you can borrow at an interest rate of 6% APR with monthly compounding. Which statement is TRUE?
It is optimal to buy the holiday by paying in cash immediately.
You do not need to know the Effective Annual rate (EAR) of the travel loan.
The monthly rate which applies to the travel loan is 0.6%
A travel loan with 4 annual payments of €1,200 and 6% APR would render the same present value as the monthly travel loan.
Assume the CAPM model holds. Teslix stock has a beta of 1.06 and Volvix stock has a beta of 1.31. The risk-free interest rate is 4% and the expected return of the market portfolio is 12%. Assume short selling is not allowed. Which statement is FALSE?
The market risk premium is equal to 8%.
The risk premium on Volvix is higher than the risk premium on Teslix.
A portfolio consisting of Volvix and Teslix may exhibit a zero risk premium.
The portfolio beta of an equally weighted portfolio consisting of Teslix and Volvix is 1.185.
In January 2021, Pfizer Icecream (PI) had a book value of equity of $950 million. Its Market-to Book ratio was equal to 1.5 and it had 90 million shares outstanding. In addition, PI had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. PI’s share price comes closest to:
$10
$12
$14
$16
Bond prices and interest rates can change because of many different factors. Suppose a new web site (new electronic trading platform) is launched further facilitating the trading of government bonds with much more ease than before. At the same time, the government budget deficit further increases because of all corona subsidies distributed to enterprises. The government decides to finance the deficit by issuing additional bonds and not by raising taxes. Which joint statement on (sovereign) bond demand and bond supply is TRUE?
The demand curve for sovereign bonds is expected to shift to the left; the supply curve for sovereign bonds is expected to shift to the right.
The demand curve for sovereign bonds is expected to shift to the right; the supply curve for sovereign bonds is expected to shift to the left.
The demand curve for sovereign bonds is expected to shift to the left; the supply curve for sovereign bonds is expected to shift to the left.
The demand curve for sovereign bonds is expected to shift to the right; the supply curve for sovereign bonds is expected to shift to the right.
Cryptic Industries has 300 million shares outstanding and expects earnings at the end of this year of $700 million. Cryptic plans to pay out 60% of its earnings in total (30% as a dividend and 30% to repurchase shares). Cryptic’s earnings are expected to grow by 7.5% per year and the future pay out rates remain constant. The fair value of one share of Cryptic using the Total Payout Model equals $56. The equity cost of capital compatible with this valuation comes closest to:
7%
8%
9%
10%
The Capital Market Line (CML) and the Security Market Line (SML) are two distinct risk expected return trade-offs that we investigated extensively. Which statement is FALSE?
The market portfolio lies on both the CML and the SML
The slope of the CML equals the Sharpe ratio of the market portfolio.
The slope of the SML is the market risk premium.
If individual stocks lie on the CML, their NPV equals zero and the market is efficient.
Which of the following statements regarding the concepts of the valuation principle, the law of one price, arbitrage and the NPV criterion are FALSE?
If future cash flows are risk-free, we no longer have to discount these cash flows when applying NPV.
One of the differences between the NPV decision rule and the payback rule for valuing investments is that the latter does not take the time value of money into account.
Projects with a negative NPV should be rejected, as accepting them is reducing the firm value.
The decision to accept positive NPV projects increases the value of the firm and is a good decision regardless of your current cash needs or preferences regarding when to spend the money.
A company considers to cut current dividends per share in order to reinvest the retained earnings in the company. This will increase the stock price provided:
The equity cost of capital exceeds the earnings growth rate.
The earnings growth rate exceeds the Return on New Investment.
The Return on New Investment exceeds the equity cost of capital.
The capital Gain rate exceeds the Return on New investment.
Consider the current one-year interest rate is 6%. One year from now, you believe the economy will start to slow down and that the one-year interest rate will fall to 5%. In two years, you expect the economy to be in the midst of a recession, causing the Federal Reserve to cut interest rates drastically and the one-year interest rate to fall even further to 2%. The current three-year interest rate that would be consistent with these one-year interest rate expectations is closest to:
2.5%
3.5%
4.5%
5.5%
Option prices (before the maturity date) are determined by different factors. Which statement is FALSE?
An increase in the volatility of a stock increases the time value of put options that have that stock as underlying asset. On the other hand, it decreases the time value of call options on the same underlying stock.
Out-of-the-money options have zero intrinsic value.
A call option cannot be worth more than the stock itself.
An American option cannot be worth less than an otherwise identical American option with an earlier exercise date.
Assume a corporation issued a 1-year zero-coupon bond with face value of $1,000. Assume there is a 10% chance that the company may default. Moreover, assume that the bond holder can recover 85% of the face value in that case. The yield to maturity on a default-free treasury zero-coupon bond of equal maturity is 4%. Assume a risk premium of 1.1%. The yield to maturity of the zero-coupon bond comes closest to:
4%
5.1%
6.7%
7.5%
When talking about the nature of volatility in financial markets, we distinguished between firm specific and systematic sources of news and risk. Which of the following statements is FALSE?
When a corporation’s CEO is fired, this constitutes an example of firm-specific risk.
The discovery of a new Covid vaccine can both represent systematic risk and firm-specific risk.
Idiosyncratic risk is by definition unavoidable which implies one should be compensated for by means of a risk premium.
When Central Bank presidents express concern about the potential for a rise in future inflation, this announcement can be considered as systematic risk.
Modernix Industries is currently trading for $27 per share. The stock pays no dividends. Consider a 6-month European call and 6-month European put on Modernix, both with an exercise price of $30. The European call premium is $2 whereas the European put premium is $3. Using Put-Call parity, the (annualized) risk-free rate comes closest to:
8%
10%
14%
18%
Assume an equally weighted portfolio consisting of 100 stocks. The stock returns are all independent with respect to each other (zero correlation) and exhibit the same standard deviation of 20%. The portfolio standard deviation comes closest to:
0.04%
2%
5%
10%
Stocks and bonds exhibit different types of risk. Which statement is FALSE?
Default-free bonds have constant bond prices.
When a rating agency announces it downgrades a corporation’s credit rating, this typically increases the yield to maturity of the corporate bond.
The standard deviation of bond returns is a measure of bond volatility.
Default-free bond returns exhibit a zero beta with respect to the market portfolio (assuming the CAPM holds).
When studying option markets we discussed different motives (including certain ‘strategies’) for using options. Which statement is FALSE?
A speculator buying a call option expects the underlying stock price to increase.
When one buys a stock together with a call option on the same stock one basically buys insurance against downside risk because this portfolio cannot drop in value below the option strike price.
Put call parity suggests a way to construct a risk-free portfolio (with certain pay off).
A speculator who forms a portfolio by writing a call and put (same underlying stock, strike price, time to maturity) expects only small fluctuations in the underlying stock price around the strike price. If not, her speculative strategy will not pay off.
Different firm types (legal forms) were studied during the course. Which statement on these legal forms is FALSE?
Private equity funds and venture capital funds are two examples of industries dominated by limited partnerships.
In a partnership it can be that some partners only have limited liability.
Partnerships are the least common type of firm.
In a sole proprietorship the owner has limited personal liability for any of the firm’s debts.
The government issued a perpetual bond that promises an annual interest payment of $10 to the holder. The current yield to maturity is 6%. Assuming the yield to maturity remains constant over time, the price of the bond immediately before the first interest payment is made comes closest to:
19
9
177
167
Which statement about corporate bankruptcy is FALSE?
Corporate bankruptcy cannot arise in corporations without debt/loans.
Corporate bankruptcy implies a transfer of ownership and control from the shareholders to the debtholders.
Corporate bankruptcy automatically implies a liquidation of the corporation.
Corporate bankruptcy arises when corporations cannot fulfill their debt obligations to their debtholders (bondholders, banks).
Consider two bonds simultaneously issued by the same government: a 25-year coupon bond and a 30-year coupon bond with common face value of $1,000. Both bonds have a coupon rate of 5%. Moreover, both bonds exhibit the same yield to maturity of 4%. Which statement is FALSE?
Both bonds trade at a premium (above par).
The 30-year bond exhibits more interest rate risk than the 25-year bond.
The 30-year bond is cheaper than the 25-year bond.
A 1% increase in their yield to maturity from 4% to 5% would result in a larger price decrease for the 30-year bond as compared to the 25-year bond.
Consider portfolios P consisting of two stocks only. The stock with the highest expected return also exhibits the highest standard deviation. We are interested in plotting the expected portfolio return (vertical axis) against the portfolio standard deviation (horizontal axis) for each possible 2-stock portfolio. Which statement is FALSE?
This curve can contain both efficient and inefficient portfolios.
The portfolio variance decreases when the correlation between the two stocks decreases (keeping all other determinants of the portfolio variance constant).
A (2-stock) portfolio is efficient when no other (2-stock) portfolios can be found with equal expected return but with lower standard deviation.
When plotting expected portfolio returns vs. portfolio volatility the curve that contains all possible portfolios is a straight line if and only if the correlation between the two stocks is 0.
Assume investors only trade on public information that is easy to interpret. Which of the following statements related to the processing of information in market prices and the efficient markets hypothesis is FALSE?
In efficient markets, investors expect the same returns for different stocks because otherwise this would represent an arbitrage opportunity.
In efficient markets, all past publicly available information relevant for a stock cannot cause changes in the current stock price.
In efficient markets, it is possible that the announcement of a merger does not impact the stock price of the target and the acquirer.
In efficient markets, you expect that the Net Present Value of a financial investment will be equal to zero.
Which statement on an investment’s Internal Rate of Return (IRR) is FALSE?
In contrast to a zero-coupon bond’s IRR, a coupon bond’s IRR cannot be calculated using a simple formula.
The IRR ‘investment rule’ states that one needs to take any investment opportunity when the IRR exceeds the opportunity cost of capital.
A coupon bond’s IRR is equal to its coupon interest rate (regardless the level of the yield to maturity).
An investment project’s IRR is the discount rate that sets the Net Present Value of a project’s cash flows equal to zero.
We considered various ways to value company equity. Which of the following statements is TRUE?
The dividend discount model can only be used when dividends have a constant growth rate.
The total pay out model can only be used when share repurchases are nonzero in magnitude.
The discounted free cash flow model uses the firm’s equity cost of capital as relevant discount rate.
Contrary to the dividend discount model, one needs to know the amount of shares outstanding when implementing the total pay out and discounted free cash flow models to determine a stock’s intrinsic value.
Consider an equally weighted portfolio that contains 10 stocks. If the average standard deviation of these stocks is 40% and the average correlation between the stocks is 25%, then the standard deviation of this equally weighted portfolio is closest to:
19.2%
5.76%
24%
30%
A lot of accounting terms related to a corporation’s financial statements are used by financial analysts. Which statement is FALSE?
The book value of the firm’s assets can fall below the book value of the firm’s liabilities.
A rise in goodwill (all else equal on the balance sheet) leads to an increase in book value of equity.
One of the steps to calculate net income in the income statement is to add interest income to Earnings Before Interest and Taxes (EBIT).
The diluted Earnings per share are not calculated by using the actual number of outstanding shares.
Which asset class historically shows the highest risk premium?
Large stocks.
Corporate bonds
Treasury Bills
Small stocks
A stock of company Notax was worth $20 on December 31, 2020 whereas it is expected to rise to $40 on December 31, 2021. Notax is paying a dividend per share of $4 over 2021. Assume constant dividend growth in the future. Which statement is FALSE?
The total (expected) stock return over 2021 equals 120%.
The constant growth rate of dividends over 2021 equals 70%
The expected capital gain rate over 2021 equals 100%.
The 2021 dividend yield equals 20%.
In January 2021, Astrazenix cookies (AC) had an enterprise value of $4168.06 million. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, AC had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. AC’s share price comes closest to:
$33.4
$35.7
$39.4
$45
Bond prices and interest rates can change because of many different factors. Assume expected inflation decreases (assume all other factors that can shift bond demand and bond supply stay constant). Which statement on corporate bond demand and bond supply is TRUE?
The demand curve for US corporate bonds is expected to shift to the left; the supply curve for US corporate bonds is expected to shift to the right.
The demand curve for US corporate bonds is expected to shift to the right; the supply curve for US corporate bonds is expected to shift to the left.
The demand curve for US corporate bonds is expected to shift to the left; the supply curve for US corporate bonds is expected to shift to the left.
The demand curve for US corporate bonds is expected to shift to the right; the supply curve for US corporate bonds is expected to shift to the right.
Coinbix Industries has 550 million shares outstanding and expects earnings at the end of this year of $800 million. Coinbix plans to pay out 70% of its earnings in total (30% as a dividend and 40% to repurchase shares). Coinbix’s earnings are expected to grow by 5% per year and the future pay out rates remain constant. The equity cost of capital is 8%. The total payout model suggests an intrinsic value of all Coinbix shares closest to:
$15,000 million
$17,000 million
$19,000 million
$21,000 million
Two stocks have the following expected returns (ABC: 4%, DEF: 7%). The correlation coefficient between the stock returns equals 0.5 and the risk-free rate is 2%. Suppose you have $5,000 in cash to invest. You decide to short sell $10,000 worth of ABC stock and invest the proceeds from your short sale, plus your $5,000, in DEF. The expected return of this investment strategy comes closest to:
9%
11%
13%
15%
Firm Zeta stock has sales of $27 million. The (net) profit margin is 10 percent. The share price is $5 and Zeta’s market capitalization equals $55 million. The earnings per share are closest to:
$0.15
$0.2
$0.25
$0.3
Assume the Capital Asset Pricing Model (CAPM) holds. Which statement is TRUE?
Securities can never have an expected return below the risk-free rate.
The alpha (α) of a stock is the intercept of a regression of the stock’s excess return on the market portfolio’s excess return.
The relevant risk measure used in the CAPM is the standard deviation.
Stocks can never have an expected return higher than the expected return on the market portfolio.
Tesmusk Corporation expects to realize a free cash flow in one year's time of $70 million. Its equity cost of capital is 6%, and the free cash flows are expected to grow by 2% per year. Assume Tesmusk debt is risk-free and the risk-free rate is 1%. The corporate tax rate is 30% and Tesmusk’s debt-to-value ratio equals 0.5. Tesmusk’s enterprise value comes closest to:
$3,000 million
$4,000 million
$5,000 million
$6,000 million
The Capital Market Line (CML) and the Security Market Line (SML) are two distinct risk expected return trade-offs that we investigated extensively. Which statement is TRUE?
If individual stocks lie below the CML this is because they are overvalued.
If individual stocks lie below the SML this is because they exhibit firm-specific risk.
The slope of the SML equals the risk premium on the market portfolio.
The market portfolio by definition has a standard deviation of 1.
Which of the following statements regarding the Valuation Principle, the Law of One Price and Arbitrage is FALSE?
Buying and selling equivalent goods in different markets to take advantage of a price difference is known as the Valuation Principle.
According to the Law of One Price, equivalent investments should trade at the same price if they simultaneously trade in different competitive markets.
In a competitive market, arbitrage opportunities are typically short lived.
A competitive market in which there are no arbitrage opportunities is called a normal market.
The following (annual) data are given for expected return and standard deviation of two stocks: E(Joe)=4%, E(Jill)=7%, SD(Joe)=5%, SD(Jill)=6%. The risk-free rate is 3%. Assume the CAPM holds and that short selling is not allowed. The correlation is unknown and can be anything between -1 and +1. Which statement is TRUE?
The risk premium on Jill stock is lower than the risk premium on Joe stock.
The Sharpe ratio of Joe stock is higher than the Sharpe ratio of Jill stock.
The beta of Jill stock is higher than the beta of Joe stock.
A zero variance portfolio consisting of these two stocks can never be formed.
Suppose we are now in year 0. Tipsy stock is expected to pay a dividend per share of $1 in year year 1. Afterwards, this dividend is expected to grow annually at 2% forever. Tipsy’s equity cost of capital is 6%. Tipsy stock’s intrinsic value in year 5 (according to the dividend discount model) comes closest to:
$24
$26
$28
$30
(Stock) option prices can be affected by different factors. Which statement is TRUE?
An American option cannot be worth less than a European option on the same underlying stock and with otherwise identical characteristics.
Whereas an option’s time value can be zero, an option’s intrinsic value is always positive.
An increase in the volatility of the underlying stock increases the intrinsic value of calls and puts on that stock (keep all other factors that influence option prices constant).
If put options are out-of-the-money that means that you do not have to pay for the option when the stock price exceeds the exercise price. The option is basically for free.
Consider a 30-year zero-coupon bond with face value of $1,000. Assume the corporations defaults with certainty and that the bondholders recover 80% of the face value. The yield to maturity on a comparable 30-year zero-coupon Treasury bill is 4%. The yield to maturity of the 30-year zero-coupon corporate bond comes closest to:
4%
4.5%
4.75%
5%
Volatility in financial markets can be caused by firm-specific or systematic risk. Which of the following statements is FALSE?
When a corporation announces quarterly earnings, it is possible that the stock price does not react to this announcement when the market already fully anticipated this news.
A stock’s standard deviation is a measure of the stock’s firm-specific risk.
Firm-specific risk can be diversified away by forming large portfolios.
When the government announces the quarterly unemployment rate, this constitutes an example of systematic risk.
A 1-year European call and European put on the same underlying stock are currently equally expensive. Both options also have the same exercise price (K=$30). The yield to maturity on a default free 1-year zero-coupon treasury bill is 3%. Using put-call parity, the stock price of the underlying stock comes closest to:
$23
$26
$29
$32
Fozzie stock’s annual expected return estimate equals 7.5%. We also know that the variance of the annual returns of Fozzie stock equals 0.0025. We used 100 years of annual data to obtain these estimates. The 95% confidence interval for the expected return of Fozzie stock comes closest to:
[5.5%;9.5%]
[6%;9%]
[6.5%;8.5%]
[7%;8%]
Stocks and bonds exhibit different types of risk. Which statement is FALSE?
Interest rate risk refers to changes in bond prices arising from changes in their yield to maturity.
Corporations without debt do not have credit risk.
The credit risk of countries is not equal to zero. Only for the US government bond market, it is often assumed that debt is risk-free.
A company’s firm-specific risk is reflected in the corporation’s equity cost of capital.
Different terms and concepts need to be distinguished when describing option markets. Which statement is TRUE?
A European call and put option on the same underlying stock, same strike price and same remaining time to expiration can both be in-the-money at the same time.
The time value of a put option on a stock can be expressed as P=Max(K-S, 0) with S the price of the underlying asset and K the exercise price.
In contrast to an option’s time value, an option’s intrinsic value is zero when it is out-of-the-money.
The holder of an option receives the premium from the writer. The latter buys the option right.
Eurosoccer Sports Wear (ESW) expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firms plans to pay out all of its earnings as a dividend. With these expectations of no growth, ESW’s current share price is $60. Suppose ESW cuts its dividend pay out rate to 75% for the foreseeable future and uses the retained earnings to open new stores. The return on its investment in these stores is expected to be 8%. Under the new dividend policy (and assuming its equity cost of capital remains unchanged), the ESW share price comes closest to:
$64.29
$56.25
$60
$75
Which of the following is a characteristic of a corporation?
Unlimited controls for its owners
The ability to raise large amounts of capital to anonymous outside investors
Unlimited liability to its owners
There is no agency problems between owners and m
750k in sales, net profit margin is 10%, the firm has 15k shares. The price earnings ratio:
12.5
7.5
10
15
Throughout the 2010s, short term interest rates in Germany were lower than short term interest rates in the US. As a result, many German investors were tempted to borrow in Euros at a German bank and invest the proceeds in government bonds of the US in dollars. Is this an example of an arbitrage opportunity?
Yes, because interest rates are lower in Germany than in the US, a profit is guaranteed
No, because German investors are not allowed to buy government bonds of the US
No, because such transactions may incur a loss for German investors if the value of the dollar falls relative to the euro. Therefore, a profit is not guaranteed
Yes, because the US will never default, a profit is guaranteed
TT currently has a bank loan of that requires to make 3 annual payments at the end of the next 3 years of 1mil each. The bank has offered to allow TT to skip making the next 2 payments and , instead make one large payment at the end of year 3. If the interest rate on the loan is 6%, then the final payment that the bank will require TT to make independent of the 2 forms of payment is closest to:
3375000
2673000
3184000
3000000
Which of the following statements is false?
The yield to maturity of a bond is the discount rate that sets the PV of the promised bond payments equal to the current market price of the bond.
The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.
The right discount rate for any a cash flow is the rate of return available in the market on other investments of comparable risk and return.
To compensate for the risk that they will receive less bond payments than they were promised if a firm defaults, corporate bond investors demand a lower interest rate than the rate on US coupon paying Treasuries with comparable maturity.
Which of the following statements is False?
The effective annual rate indicates the amount of interest that will be earned at the end of one year.
Because interest rates might be quoted for different time intervals, it is often necessary to adjust the interest rate to a maturity that matches that of our cashflows
The annual percentage rates indicates the amount of interest including the effect of compounding
The annual percentage rates indicates the amount of simple interest earned in one year
Which of the following statements is false?
If interest rates rise, bond prices will increase
The yield to maturity is typically stated as an annual rate by multiplying the calculated yield to maturity by the nr of coupon payments per year, thereby converting it to an annual percentage rate
Zero coupon bond with 20 years maturity. The percentage change in the price of the bond if the yield decreases from 7% to 5%
38%
22%
17%
46%
A corporate bond which receives a BBB rating from S&P is considered
A high yield bond
A defaulted bond
An investment grade bond
A junk bond
Which of the following statements is false?
Problems can arise using the IRR method when the mutually exclusive investments have different time horizons.
When investment opportunities have different scales, one cannot compare their respective IRRs directly.
When ranking projects by their IRRs, one take into consideration the risk differences between the projects
Multiple incremental IRRs might exist
Which statement is false?
The variance increases with the magnitude of the deviation from the mean
If the return is riskless and never deviates from the mean, then the standard deviation is 1
The variance is the expected squared deviation from the mean
The common measures of the risk of a probability distribution are its variance and standard deviation
Which of the statements is false?
The market portfolio is not the only portfolio that can have a beta of 1
The CAPM model holds if investors have heterogenous expectations regarding the volatilities, correlations and expected return of securities
Stocks that earn on average the risk free rate can still exhibit firm specific risk
The CAPM describes the relation between the expected return and the beta for individual stocks but also for stock portfolios
Consider an equally weighted portfolio that contains 5 stocks. If the average volatility is 40% and the correlation is 0.5, then the volatility of this equally weighted portfolio is equal to
17%
31%
19%
44%
When you are the seller of an option contract that allows the counter party to sell an asset at a fixed price in some future date , this means you are
Short a put option
Long a call option
Short a call option
Long a put option
An investor buys 100 shares of stock for 92 and at the same time writes a call option on the same stock with a strike price of 100 at 1.5. If the call is exercised when the market price is 104, what is the investor`s profit?
950
800
150
1350
Which of the following statements related to a corporation`s bankruptcy is false?
In bankruptcy, management is given the possibility to reorganize the corporation and renegotiate with debt holders.
Because a corporation is a separate legal entity, the corporate debt holders are entitled to seize the assets of the corporation in compensation for default.
As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.
If the corporation fails to satisfy debt holders` claims, debt holders may lose corporate control
Which statement is true?
The dividend discount model can only be applied when future dividends are expected to be nonzero.
The dividend discount model with constant dividend growth assumes that the growth rate is larger than the cost of equity.
The total payout model can also be applied when firms do not engage in share repurchases
The discounted free cash flow model uses the firm`s cost of debt as relevant discount rate.
Option 1: you pay 20k in cash immediately. Option 2: You pay a monthly loan of 500 for the next 4 years. Suppose you can borrow at the interest rate of 6% APR with monthly compounding. Which statement is true?
Option 1 is optimal.
Option 2 is optimal.
he monthly rate which applies to the car loan is 0.8%.
A 4 year car loan with annual payments of 6k and 6% APR would render the same present value as the monthly car loan.
Expected inflation goes down. What happens to bond supply and demand?
Demand curve shifts to the left, supply curve shifts to the right
Demand curve shifts to the right, supply curve shifts to the left
Demand curve shifts to the left, supply curve shifts to the left
Demand curve shifts to the right, supply curve shifts to the right
250 mil shares, earnings of 800mil, plans to pay out 50%, earnings are expected to grow by 7.5% per year, future payout rates remain constant, the equity cost of capital is 10%. The fair value of a share?
60
64
70
75
The current one year interest rate is 6%. One year from now, the one year interest rate will be 5%. In 2 years the one year interest rate will fall to 2%. The money year interest rate will then rise to 3% and continue to rise by 1% until it reaches 6% where it will remain from then on. The current two year interest rate that would be consistent with these one year expectations is closest to:
5%
5.5%
5.06%
8.12%
You want to save 1k for 5 years.
Option 1: APR of 5% (monthly compounding)
Option 2: APR of 7% (semi-annual compounding)
Which statement is true?
Option 1 with 1410
Option 2 with 1283
Option 1 withy 1283
Option 2 with 1410
Stock market prices are characterized by so-called bid-ask spreads. The following
statement about bid-ask spreads is TRUE:
More liquid stocks typically exhibit higher bid-ask spreads than less liquid stocks
Market makers at the NYSE provide liquidity to the market by matching buyers and
sellers and make the trade even when they did not have another customer willing to
take the other side of the trade
Customers always buy at the bid (the lower price) and sell at the ask (the higher
price).
The bid-ask spread is paid by the market makers
When using the Net Present Value criterion for investment valuation, the risk-free
rate should not be used as discount rate when
the investor is risk neutral.
the investor is risk averse.
the project's expected cash flows are perfectly predicable and thus known.
the beta of the company stock that considers the investment equals zero and
the company has no debt
Your father invested a certain amount of his own money into a savings account
on your name 30 years ago. The annual interest rate is 4%. How much money did he
initially save when you receive
now
€1,000,000?
Between €310,000 and €315,000
More than €315,000
Between €305,000 and
€310,000
Less than €305, 000
Which of the following statements related to bond risk is FALSE?
The credit spread typically refers to the yield difference between corporate and
government bonds. in the same country
The term spread is mostly positive and reflects that long-term bonds are seen as
riskier than short-term bonds
An increase in bond risk generally decreases bond prices
Interest rate risk implies that bond prices fluctuate as a result of changes in
the coupon interest rate
Suppose the Dutch government decides to abolish dividend taxes. Assume that all
other factors that may shift bond demand and bond supply stay constant. You wonder
what the impact is of abolishing dividend taxes on the market for Dutch government
bonds. Which statement is TRUE?
The supply curve for Dutch government bonds is expected to shift to the left.
The supply curve for Dutch government bonds is expected to shift to the right.
The demand curve for Dutch government bonds is expected to shift to the left.
The demand curve for Dutch government bonds is expected to shift to the right.
Assume the Brazilian (state-owned) oil company Petrobras discovers an enormous
oilfield in the Gulf of Mexico (a significant part of Brazil's public budget is financed
with Petrobras dividends). Which statement is FALSE?
The supply of Brazilian government bonds is expected to shift to the right because
the Brazilian government is more prosperous now and can spend more
The demand for Brazilian government bonds is expected to shift to the right
because the creditworthiness of the country has increased due to the additional
buffer of natural resources.
The yield to maturity on Brazilian government bonds is expected to decrease.
The supply of Brazilian government bonds is expected to shift to the left because
one needs less debt financing due to the higher revenues from oil
