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Terms in this set (71)
Which of the following statements typically does not characterize the structure of an investment company?
a. An investment company adopts a corporate form of organization.
b. An investment company invests a pool of funds belonging to many investors in a
portfolio of individual investments.
c. An investment company receives an annual management fee ranging from 3 to 5
percent of the total value of the fund.
d. The board of directors of an investment company hires a separate investment
management company to manage the portfolio of securities and handle other administrative duties.
c. An investment company receives an annual management fee ranging from 3 to 5
percent of the total value of the fund.
Which of the following is not part of the expense statement?
a. Shareholder transactions expenses
b. Shareholder demographic profile
c. Annual operating expenses
b. Shareholder demographic profile
Which of the following is the least likely advantage of mutual fund investing?
a. Diversification
b. Professional management
c. Convenience
d. Mutual fund returns are normally higher than market average returns
Mutual fund returns are normally higher than market average returns
An open-end mutual fund is owned by which of the following?
a. An investment company
b. An investment advisory firm
c. A "family of funds" mutual fund company
d. Its shareholders
d. Its shareholders
Which of the following is most true of a closed-end investment company?
a. The fund's share price is usually greater than net asset value.
b. The fund's share price is set equal to net asset value.
c. Fund shares outstanding vary with purchases and redemptions by shareholders.
d. Fund shares outstanding are fixed at the issue date.
d. Fund shares outstanding are fixed at the issue date.
A closed-end fund is owned by which of the following?
a. An investment company
b. An investment advisory firm
c. A "family of funds" mutual fund company
d. Its shareholders
d. Its shareholders
Which of the following statements regarding exchange-traded funds (ETFs) is false?
a. ETFs are funds that can be traded on a stock market.
b. ETF investors own shares of the underlying fund sponsor.
c. ETF shares can be sold short.
d. ETF shares can be bought on margin.
b. ETF investors own shares of the underlying fund sponsor.
Closed-end funds and exchange-traded funds (ETFs) have which of the following characteristics in common?
a. Shares of both closed-end funds and ETFs trade in the secondary market.
b. Both closed-end funds and ETFs stand ready to redeem shares.
c. The structures of closed-end funds and ETFs prevent shares from trading at a significant
premium or discount to NAV.
d. Neither ETF nor closed-end fund managers receive a management fee.
a. Shares of both closed-end funds and ETFs trade in the secondary market.
Growth, value, large-cap, and small-cap investing are all examples of:
a. Style investment strategies
b. Sector investment strategies
c. Index investment strategies
d. Lifestyle investment strategies
a. Style investment strategies
One of the main advantages to investing in a fund of funds (FOF) is that FOFs provide:
a. Improved diversification of assets
b. Higher expected returns
c. Lower management fees
d. Higher volatility of returns
a. Improved diversification of assets
Which mutual fund type will most likely incur the smallest tax liability for its investors?
a. Index fund
b. Municipal bond fund
c. Income fund
d. Growth fund
b. Municipal bond fund
Which mutual fund type will most likely incur the greatest overall risk levels for its investors?
a. Large-cap index fund
b. Insured municipal bond fund
c. Money market mutual fund
d. Small-cap growth fund
d. Small-cap growth fund
Which of the following mutual fund fees is assessed on an annual basis?
12b-1 fees
Front-end load
Back-end load
Contingent deferred sales charge (CDSC)
...
Which of the following mutual fund fees will most likely be the biggest expense for a long-term fund investor?
a. 12b-1 fees
b. Front-end load
c. Back-end load
d. Contingent deferred sales charge (CDSC)
12b-1 fees
Which of the following mutual fund fees and expenses is the most difficult for investors to assess?
a. Sales charges or "loads"
b. 12b-1 fees
c. Management fees
d. Trading costs
d. Trading costs
You purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2010, at an offering price of $47.10 per share. The front-end load for this fund is 5 percent, and the back-end load for redemptions within one year is 2 percent. The underlying assets in this mutual fund appreciate (including reinvested dividends) by 8 percent during 2010, and you sell back your shares at the end of the year. If the operating expense ratio for the New Pacific Growth Fund is 1.95 percent, what is your total return from this investment? What do you conclude about the impact of fees in evaluating mutual fund performance?
Answer: - 1.2%
Since you have to pay 5% in front end load for this fund, your actual investment in the fund is (2000 shares
$47.10 per share)
1.05 = 98,910 (where 94,200 is paid for the shares and the remaining is paid for the front-end load fee).
When you sell back your shares at the end of the year, the NAV of the fund is: 2000 shares
$47.10 per share
(1 + 0.08 - 0.0195)
Since you have to pay the back-end load of 2%, your actual cash when you sell the shares will be:
2000 shares
$47.10 per share
(1 + 0.08 - 0.0195) * (1-0.02) = 97,901.118
Rate of return = (97,901.118 - 98,910)/ 98,910 = -1.2%
The Bruin Stock Fund sells Class A shares that have a front-end load of 5.75 percent, a 12b-1 fee of .23 percent, and other fees of .73 percent. There are also Class B shares with a 5 percent
back-end load fee that declines 1 percent per year, a 12b-1 fee of 1.00 percent, and other fees of .73 percent.
If the portfolio return is 10 percent per year and you plan to sell after the third year, should you invest in Class A or Class B shares?
What if your investment horizon is 20 years?
Let's assume you invest $1 in each of the classes.
For class A, since you have to pay a front-end load of 5.75%, only 1
(1- 0.0575) is available for invested. If the portfolio return is 10% per year and you plan to sell after the third year, then after deducting the expenses, you will have 1
(1- 0.0575) * (1 + 10% - 0.23% - 0.73%)3 = $1.2219
For class B, since you have to pay a 5% back-end load that declines 1 percent per year, you will have to pay a fee of 3% if you plan to sell after the third year.
If the portfolio return is 10% per year and you plan to sell after the third year, then after deducting the expenses, you will have 1 * (1 + 10% - 1% - 0.73%)3(1-3%) = $1.2311
If your investment horizon is 20 years,
Class A: you will have 1
(1- 0.0575)
(1 + 10% - 0.23% - 0.73%)20 = $5.3210
Class B: you will have 1 * (1 + 10% - 1% - 0.73%)20 = $4.899. The back-end load is eliminated after year 5..
A company has a return on equity of ROE = 20 percent, and from earnings per share of EPS = $5, it pays a $2 dividend. What is the company's sustainable growth rate?
a. 8 percent
b. 10 percent
c. 12 percent
d. 20 percent
Sustainable growth rate = ROE
(1 - payout ratio) = 0.2
(1 - 2/5) = 0.12
If the return on equity for a firm is 15 percent and the retention ratio is 40 percent, the sustainable growth rate of earnings and dividends is which of the following?
a. 6 percent
b. 9 percent
c. 15 percent
d. 40 percent
Sustainable growth rate = ROE
(1 - payout ratio) = ROE
retention ratio = 0.15 * 0.4 = 0.06
A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7 percent and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at $2.10, the value of the stock is closest to:
a. $19.09
b. $30.00
c. $52.50
d. $70.00
This is scenario 1 where the dividend stays constant forever.
Today value of stock = Constant dividend / required rate of return
First, calculate required rate of return using CAPM = 0.07 + 0.04 = 0.11. Notice that we don't need the beta of the stock to calculate the required rate of return on the stock in this question because the problem gives us the risk premium for "THIS" stock specifically = 0.04 = beta of this stock *(Rm - Rf)
Second, today value of stock = Constant dividend / required rate of return = 2.1/0.11 = 19.09
The constant growth dividend discount model will not produce a finite value if the dividend growth rate is which of the following?
a. Above its historical average.
b. Above the required rate of return.
c. Below its historical average.
d. Below the required rate of return.
b. Above the required rate of return.
In applying the constant growth dividend discount model, a stock's intrinsic value will do which of the following when the required rate of return is lowered?
a. Decrease.
b. Increase.
c. Remain unchanged.
d. Decrease or increase, depending on other factors.
b. Increase.
The constant growth dividend discount model would typically be most appropriate for valuing the stock of which of the following?
a. New venture expected to retain all earnings for several years.
b. Rapidly growing company.
c. Moderate growth, mature company.
d. Company with valuable assets not yet generating profits
c. Moderate growth, mature company.
A stock has a required return of 15 percent, a constant growth rate of dividend payout ratio of 50 percent. What should the stock's P/E ratio
a. 3.0
b. 4.5
c. 9.0
d. 11.0
Today value of stock = !"($%&) (this is scenario #3 where the dividend ()&
10 percent, and a be?
grows at a constant rate forever)
P/E= today value of stock/ Earnings = (D0(1+g)/r-g)/E =D0(1+g)/E(r-g) = D0/E
(1+g)/r-g = .5
((1+.1)/(.15-.1)) = 11
Which of the following assumptions does the constant growth dividend discount model require?
I. Dividends grow at a constant rate.
II. The dividend growth rate continues indefinitely.
III. The required rate of return is less than the dividend growth rate.
a. I only
b. III only
c. I and II only
d. I, II, and III
c. I and II only
A stock will not pay dividends until three years from now. The dividend then will be $2.00 per share, the dividend payout ratio will be 40 percent, and return on equity will be 15 percent. If the required rate of return is 12 percent, which of the following is closest to the value of the stock?
a. $27
b. $33
c. $52
d. $67
Sustainable growth rate after year 3 = ROE
(1 - payout ratio) = 0.15
(1 - 0.4) = 0.09
Value of the stock at the end of year 3 = (D3(1+g))/(r-g)= $2*(1+.09)/(.12-.09) = 72.6667 (this is scenario #3 where the dividend grows at a constant rate forever starting from the end of year 3 or beginning of year 4)
Value of the stock today = Value of the stock at the end of year 3 / (1+r)3 = 72.6667 / (1.12)3 = 51.72 = 52.
Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5 percent. If you require a 12 percent return on the stock, what is the value of the stock?
a. $28.57
b. $28.79
c. $30.00
d. $31.78
This is scenario #5. The two-stage dividend growth model assumes that a firm will initially grow non-constantly for T years, and thereafter, it will grow at a rate g < k during a perpetual second stage of growth.
P =PV(non-constant-dividends)+ (Dt(1+g))/(k-g)(1+k)^T
D1 = 2
D2 = D1
(1+g) = 2
(1+0.05) = 2.1
DT (1+ g) (k-g)(1+k)
Today value of the stock = D1/(1+r) + (D1(1+g)/(k-g)(1+k)^1= 2/1.12 + ((2*1.05)/(.12-.05)(1+.12)^1) = 28.57
A share of stock will pay a dividend of $1.00 one year from now, with dividend growth of 5 percent thereafter. In the context of a dividend discount model, the stock is correctly priced at $10 today. According to the constant dividend growth model, if the required return is 15 percent, what should the value of the stock be two years from now?
a. $11.03
b. $12.10
c. $13.23
d. $14.40
After the end of year 1 (beginning of year 2), the dividend will grow at a constant rate of 5%. Thus, the value of the stock at the end of year 1 (or beginning of year 2) can be calculated using the Gordon growth model (scenario 3):
P2 = = D3 / (k-g) = D1(1+g)2 /(k-g) = 1*(1+0.05)2/(0.15 - 0.05) = 11.025
A firm has EBIT of $275 million, which is net of $52 million in depreciation. In addition, the firm had $42 million in capital expenditures and an increase in net working capital of $5 million. The firm's tax rate is 35 percent. The firm's FCF is closest (in millions) to:
a. $280
b. $101
c. $231
d. $184
Free cash flow = Net income + Depreciation - Net capital spending = 275 * (1-0.35) + 52 - (42 + 5) = 183.75
Net income = EBIT - tax = EBIT
(1- tax rate) = 275
(1-0.35)
Net capital spending = capital expenditure + increased in net working capital
A firm had a free cash flow (FCF) in the prior year of $125 million. The FCF is expected to grow at 3 percent per year into perpetuity. The appropriate discount rate is 12 percent. What is the firm's current value (in millions) based on the FCF model?
a. $1,042
b. $1,389
c. $1,555
d. $1,431
...
Two similar companies acquire substantial new production facilities, which they both will depreciate over a 10-year period. However, Company A uses accelerated depreciation while Company B uses straight-line depreciation. In the first year that the assets are depreciated, which of the following is most likely to occur?
a. A's P/CF ratio will be higher than B's.
b. A's P/CF ratio will be lower than B's.
c. A's P/E ratio will be higher than B's.
d. A's P/E ratio will be lower than B's.
c. A's P/E ratio will be higher than B's.
An analyst estimates the earnings per share and price-to-earnings ratio for a stock market series to be $43.50 and 26 times, respectively. The dividend payout ratio for the series is 65 percent. The value of the stock market series is closest to
a. 396
b. 735
c. 1,131
d. 1,866
𝐸𝑃 = 2 6 → 𝑃 = 2 6 × 𝐸 = 2 6 × 4 3 . 5 = 1 , 1 3 1
Which of the following is an advantage of the enterprise value ratio as compared to price ratios?
a. The EV ratio excludes interest expense.
b. The EV ratio adds the value of the firm's cash holding.
c. The EV ratio captures the value of both firm debt and equity.
d. The EV ratio controls for the market risk premium while price ratios do not.
c. The EV ratio captures the value of both firm debt and equity.
A company's return on equity is greater than its required return on equity. The earnings multiplier (P/E) for that company's stock is most likely to be positively related to the
a. Risk-free rate.
b. Market risk premium.
c. Earnings retention ratio.
d. Stock's capital asset pricing model beta.
c. Earnings retention ratio.
The residual income model separates the value of the firm into two basic components. What are these two components?
a. The current book value and the present value of future earnings.
b. The value of earnings per share and the value of cash flow per share.
c. The current value of the firm's shares and the future value of its shares.
d. The time value of money and the value of bearing risk.
a. The current book value and the present value of future earnings.
Residual income is
a. The actual earnings less expected earnings.
b. Any increase in the value of the firm.
c. The value of profitable investment projects.
d. The value added by economical use of assets.
a. The actual earnings less expected earnings.
The clean surplus relation says that
a. Assets minus liabilities minus shareholder's equity equals the change in current assets plus debt payments.
b. The difference between earnings and dividends equals the change in book value.
c. Dividends minus earnings equals one minus the payout ratio.
d. The difference between earnings and dividends equals the change in surplus inventory.
b. The difference between earnings and dividends equals the change in book value.
A market anomaly refers to
a. An exogenous shock to the market that is sharp but not persistent.
b. A price or volume event that is inconsistent with historical price or volume trends.
c. A trading or pricing structure that interferes with efficient buying or selling of securities.
d. Price behavior that differs from the behavior predicted by the efficient markets
hypothesis.
d. Price behavior that differs from the behavior predicted by the efficient markets
hypothesis.
Which of the following assumptions does not imply an informationally efficient market?
a. Security prices adjust rapidly to reflect new information.
b. The timing of one news announcement is independent of other news announcements.
c. The risk-free rate exists, and investors can borrow and lend unlimited amounts at the
risk-free rate.
d. Many profit-maximizing participants, each acting independently of the others, analyze and value securities.
c. The risk-free rate exists, and investors can borrow and lend unlimited amounts at the
risk-free rate.
After lengthy trial and error, you discover a trading system that would have doubled the value of your investment every six months if applied over the last three years. Which of the following problems makes it difficult to conclude that this is an example of market inefficiency?
a. Risk-adjustment problem
b. Relevant information problem
c. Dumb luck problem
d. Data snooping problem
d. Data snooping problem
In discussions of financial market efficiency, which of the following is not one of the stylized forms of market efficiency?
a. Strong form
b. Semistrong form
c. Weak form
d. Economic form
d. Economic form
Which of the following is not considered a problem when evaluating the ability of a trading system to "beat the market"?
a. Risk-adjustment problem
b. Relevant information problem
c. Data measurement problem
d. Data snooping problem
c. Data measurement problem
Which month of the year, on average, has had the highest stock market returns as measured by a small-stock portfolio?
a. January
b. March
c. June
d. December
a. January
Which of the following intraday changes in the Dow Jones Industrial Average (DJIA) will trigger a circuit breaker halting NYSE trading for one hour?
a. 10 percent drop before 2 P.M.
b. 10 percent drop after 2 P .M.
c. 10 percent rise before 2 P .M.
d. 10 percent rise after 2 P .M.
a. 10 percent drop before 2 P.M.
The SEC has regulations that prohibit trading on inside information. If the market is efficient, such regulation is not needed.
a. Weak
b. Semistrong
c. T echnical
d. Strong
d. Strong
Which of the following is a possible explanation of the January effect?
I. Institutional window dressing
II. Bonus demand
III. Tax-loss selling
a. I only
b. I and II only
c. I and III only
d. I, II, and III
c. I and III only
NYSE Circuit Breakers Circuit breakers implemented by the NYSE were designed to
a. Reduce the January effect.
b. Reduce the effect of technical trading.
c. Eliminate program trading.
d. Slow a market decline.
d. Slow a market decline.
Assume the market is semistrong-form efficient. The best investment strategy is to
a. Examine the past prices of a stock to determine the trend.
b. Invest in an actively managed mutual fund whose manager searches for underpriced
stocks.
c. Invest in an index fund.
d. Examine the financial statements for a company to find stocks that are not selling at intrinsic value.
c. Invest in an index fund.
Assume the market is weak-form efficient. If this is true, technical analysts and fundamental analysts earn excess returns.
a. Could; could
b. Could; could not
c. Could not; could not
d. Could not; could
d. Could not; could
Which of the following is not true concerning the efficient markets hypothesis?
a. Markets that are less organized are not as likely to be efficient.
b. Markets with wide fluctuations in prices cannot be efficient.
c. The efficient markets hypothesis deals only with the stock market.
d. Prices in an efficient market are fair on average.
b. Markets with wide fluctuations in prices cannot be efficient.
You purchase a stock that you expect to increase in value over the next year. One year later, after the discovery that the CEO embezzled funds and the company is close to bankruptcy, the stock has fallen in price. Which of the following statements is true?
a. This is a violation of weak-form efficiency.
b. This is a violation of semistrong-form efficiency
c. This is a violation of all forms of market efficiency.
d. This is not a violation of market efficiency.
d. This is not a violation of market efficiency.
Which of the following statements concerning market efficiency is true?
a. If the market is weak-form efficient, it is also semistrong-form efficient.
b. If the market is semistrong-form efficient, it is also strong-form efficient.
c. If the market is weak-form efficient, it is also strong-form efficient.
d. If the market is semistrong-form efficient, it is also weak-form efficient.
d. If the market is semistrong-form efficient, it is also weak-form efficient.
The discount rate is the rate charged by the Federal Reserve to commercial banks for overnight reserve loans.
A) True B) False
A) True
Investors buy at the bid price and sell at the ask price. A) True
B) False
B) False
A Yankee bond is issued by a U.S. corporation, denominated in U.S. dollars, and is sold outside of the U.S.
A) True
B) False
B) False
Which one of these rates is considered the bellwether rate for short term bank commercial loans?
A) discount
B) call
C) Federal funds
D) prime
E) commercial paper
D) prime
The price of a $100,000 security increased by 6 basis points. What is the dollar amount of the increase?
A) $.60
B) $6
C) $60
D) $600
E) $6,000
C) $60
A security has a bank discount yield of 3.88 percent. What is its bond equivalent yield if it matures in 42 days?
A) 3.82 percent
B) 3.85 percent
C) 3.91 percent
D) 3.95 percent
E) 3.98 percent
BEY = (365
discount yield)/(360-days to maturity
discount yield) = (365
.0388) /(360-42
.0388)
= 0.0395
D) 3.95 percent
What is the effective annual rate on a home mortgage if the annual percentage rate is 7.5 percent and interest is compounded monthly?
A) 7.76 percent
B) 7.81 percent
C) 7.83 percent
D) 7.86 percent
E) 7.88 percent
EAR= (1+APR/m)m -1 =(1+0.075/12) 12 -1 = 0.0776
The Treasury yield curve:
I. is generally expected to be flat.
II. plots yields against maturities.
III. is the same as the term structure of interest rates. IV. reveals the cost of risk-free borrowing.
A) I and II only
B) II and IV only
C) I, II, and IV only
D) II, III, and IV only
E) I, II, III, and IV
B) II and IV only
Today, r1 = 4.4 percent and f1,1 = 3.203 percent. What is the value of r2? A) 3.26 percent
B) 3.49 percent
C) 3.80 percent
D) 4.08 percent
E) 4.11 percent
(1 + R2)^2 = (1+R1)
(1+F1,1) = 1.044
1.03203 = 1.077439
- (1 + R2) = 1.077439^1/2
- R2 = 1.077439^1/2 - 1 = 0.03799
Which one of the following relates to the possibility that a bond issuer might not repay the bond's principal as stated in the bond indenture agreement?
A) interest rate risk premium
B) liquidity premium
C) default premium
D) real interest rate
E) inflation premium
C) default premium
If the yield to maturity is greater than the coupon rate, a bond will sell at a premium. A) True
B) False
B) False
Higher coupon bonds are more volatile than lower coupon bonds. A) True
B) False
B) False
A $1,000 par value bond is quoted at 101.3 and pays $55 in interest each year. The coupon rate is _____ percent and the current yield is _____ percent.
A) 5.25; 5.36
B) 5.25; 5.50
C) 5.50; 5.43
D) 5.50; 5.61
E) 5.50; 5.66
Coupon rate = $ coupon amount / par value = 55 /1,000 = 5.5%
Current yield = $ coupon amount / bond price =55 / (101.3% ́ 1,000) = 0.05429
C) 5.50; 5.43
A semiannual coupon bond has a market price of $1,005.21 and a face value of $1,000. What is the coupon rate if the yield to maturity is 8.4 percent and the bond matures 7 years from now? A) 8.40 percent
B) 8.50 percent
C) 8.55 percent
D) 8.60 percent
E) 8.65 percent
Using financial calculator with the following inputs: N = 7 * 2 = 14
PV = -1,005.21
FV = 1,000
I/Y = 8.4 / 2 = 4.2
CPT PMT. You will find PMT = 42.5. This is the semi-annual coupon amount. Thus, the annual coupon payment = 42.5 * 2 = $85.
Coupon rate = Annual coupon payment / Par value = 85/1000 = 8.5%
B) 8.50 percent
Which one of the following statements is correct?
A) The YTM is less than the coupon rate for a discount bond.
B) A discount bond has a face value that is less than its market price.
C) A par value bond has a current yield that is greater than the coupon rate. D) A premium bond sells for less than par.
E) The coupon rate is greater than the YTM for a premium bond.
E) The coupon rate is greater than the YTM for a premium bond.
The price of a bond quote as seen in a newspaper is the ____ price and the price you pay to purchase a bond is the _____ price.
A) clean; clean
B) clean; dirty
C) dirty; clean
D) dirty; dirty
E) Answer depends on whether the bond pays interest annually or semiannually.
B) clean; dirty
Which one of these statements is true?
A) A 5-year bond is less sensitive to interest rate changes than a 1-year bond.
B) A 30-year bond is 50 percent more sensitive to interest rate changes than a 20-year bond. C) A par value bond has no interest rate sensitivity.
D) A premium bond with 5 years to maturity will always sell for more than par value until the bond matures.
E) The realized return rarely equals the YTM, especially if the bond is considered long-term.
E) The realized return rarely equals the YTM, especially if the bond is considered long-term.
The yield on a bond increases from 6.5 to 7.0 percent. What is the percentage change in the bond's price if the bond's modified duration is 5.9 years?
A) -3.59 percent
B) -3.14 percent
C) -2.95 percent
D) -2.28 percent
E) -1.09 percent
% change in bond price = -modified duration ́ Change in YTM = -5.9 * (0.07 - 0.065) = -0.0295 = -2.95%
Which one of the following has the longest duration? A) 5year, 10 percent coupon bond
B) 5year, 15 percent coupon bond
C) 10year, zero coupon bond
D) 10year, 10 percent coupon bond
E) 10year, 15 percent coupon bond
C) 10 year, zero coupon bond
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