finance exam 2

1) In comparing an ordinary annuity and an annuity due, which of the following is true?A) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.B) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.q The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.D) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
2) The future value of a dollar as the interest rate increases and the further in the future an initial deposit is to be received.A) decreases; decreasesb increases decreasesq decreases;increasesd increases increases increases increases
the _________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. —A) Inflationary B) Risk- free q Real D) Nominal q Real
4) Generally, an increase in risk will result in . Hint: use TVM basic formulas 4) _ A)a lower return on investment B) a higher required return or interest rateq a lower required return or interest rate D) a higher return on investment D) a higher return on investment
rate of interest is the actual rate charged by the supplier and paid by the demander of funds _ A) Risk- free B) Nominal q Real D) Inflationary B) Nominal
is a graphic depiction between the maturity and rate of return for bonds with similar 6) _ A) risk- return profileq aggregate demand curve B) yield curveD) supply function B) yield curve
yield curve reflects higher expected future rates of interest. A) linear B) downward- slopingq upward- sloping D) flat q upward- sloping
8) The key inputs to the valuation process include .Hint: Think of most complete description A) returns and risk B) cash flows and discount rateq returns, discount rate, and risk D) cash flow, cash flow timing, and risk D) cash flow, cash flow timing, and risk
9) The value of any asset is the A) sum of all future cash flows it is expected to provide over the relevant time periodB) present value of the sum of all future cash flows it is expected to provide over the relevant time periodq sum of all compounded future cash flows it is expected to provide over the relevant time periodD) sum of the present values of all future cash flows it is expected to provide over the relevant time period B) present value of the sum of all future cash flows it is expected to provide over the relevant time period
10) In the basic valuation model, risk is generally incorporated into the A) cash flows B) discount rate q timing D) total value A) cash flows
11) A type of long- term financing used by both corporations and government entities is _A) retained earnings B) bondsq common stocks D) preferred stocks B) bonds
12) Corporate bonds have a . 12) A) specified coupon rate paid annuallyq par value of $1,000 B) face value of $5,000D) market price of $1,000 A) specified coupon rate paid annually
13) The value of a bond is the present value of its interest payments plus , 13)A) its face value B) future value of its par valueq present value of its par value D) present value of interest payment q present value of its par value
14) Bonds which sell at less than face value are priced at a , while bonds which sell at greater 14) than face value sell at a .A) discount; premiumq par; premium B) coupon;premiumD) discount; par A) discount; premium
15) If the required return is less than the coupon rate, a bond will sell at A) book value B) par q a premium .D) a discount q a premium
16) Which of the following is a difference between common stock and bonds?A) Bondholders have a senior claim on assets and income relative to stockholders.B) Dividend paid to stockholders is tax- deductible but interest paid to bondholders are not.q Bondholders have a voice in management; common stockholders do not.D) Stocks have a stated maturity but bonds do not. A) Bondholders have a senior claim on assets and income relative to stockholders.
17) Holders of equity capital _A) own the firmq receive interest payments B) have loaned money to the firmD) receive guaranteed income A) own the firm
18) Which of the following typically applies to common stock but not to preferred stock?A) voting rights B) legally considered as equity in the firmq par value D) dividend yield 18)_ A) voting rights
20) If the expected return is above the required return on an asset, rational investors will . 20)A) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnB) sell the asset, since price is expected to decreaseq buy the asset, which will drive the price down and cause the expected return to reach the level of the required returnD) buy the asset, which will drive the price up and cause expected return to reach the level of the required return D) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
is a guide to a firm’s value if it is assumed that investors value the earnings of a given 21)firm in the same way they do the average firm in the industry.A) The present value of the dividends B) The PIE multipleq Liquidation value D) Book value B) The PIE multiple
22) A common approach of estimating the variability of returns involving the forecast of pessimistic, 22)most likely, and optimistic returns associated with an asset is called _A) scenario analysis B) marginal analysisq break- even analysis D) DuPont analysis scenario analysis
23) Risk aversion is the behavior exhibited by managers who require A) an increase in return, for a given increase in riskB) an increase in return, for a given decrease in riskq no changes in return, for a given increase in riskD) decrease in return, for a given increase in risk A) an increase in return, for a given increase in risk
A(n) _________ distribution shows all possible outcomes and associated probabilities for a given A) lognormal B) exponential q probability D) discrete q probability
is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.A) Rangeq Standard deviation B) VarianceD) Probability distribution A) Range
26) The the coefficient of variation, the the risk. 26)_ A) higher; lower B) more stable; higherq lower; lower D) lower; higher q lower; lower
27) The goal of an efficient portfolio is to _ 27)A) minimize profit in order to minimize riskB) achieve a predetermined rate of return for a given level of riskq maximize risk in order to maximize profitD) minimize risk for a given level of return D) minimize risk for a given level of return
28) A measures the dispersion around the expected value. 28) A) coefficient of variation B) chi squareq standard deviation D) mean q standard deviation
29) Perfectly correlated series move exactly together and have a correlation coefficient of 29) — while perfectly correlated series move exactly in opposite directions and have acorrelation coefficient of _ A) negatively; +1; positively; -1q positively; +1; negatively; -1 B) negatively; -1; positively; +1D) positively; -1; negatively; +1 q positively; +1; negatively; -1
A(n) portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return A) risk- free B) risk- indifferent q efficient D) risk- neutral q efficient
31) The of a given outcome is its chance of occurring. A) standard deviation B) reliabilityq probability D) dispersion q probability
32) The portfolio with a standard deviation of zero .. (See Table 8.1) 32) A) is comprised of Assets A and B B) is comprised of Assets A and Cq is not possible D) cannot be determined B) is comprised of Assets A and C
33) The correlation of returns between Asset A and Asset B can be characterized as Table 8.1) . (See 33) A) perfectly positively correlatedq uncorrelatedperfectly negatively correlated perfectly negatively correlated
34) Risk that affects all firms is called _A) nondiversifiable riskq maturity risk B) reinvestment riskD) unsystematic risk 34) A) nondiversifiable risk
35) A beta coefficient of +1 represents an asset that A) is more responsive than the market portfolioB) is unaffected by market movementq has the same response as the market portfolioD) is less responsive than the market portfolio q has the same response as the market portfolio
36) The portion of an asset’s risk that is attributable to firm- specific, random causes is called _A) market risk B) unsystematic (diversifiable) riskq political risk D) nondiversifiable risk A) market risk B) unsystematic (diversifiable) risk
37) In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn. T
38) In the valuation process, the higher the risk, the greater is the required return t
39) The inclusion of assets from countries with business cycles that are not highly correlated with theU.S. business cycle reduces the portfolio’s responsiveness to market movements. t
40) The range of an asset’s risk is found by subtracting the worst outcome from the best outcome t
41) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance. t

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