Multiple Choice 1 Assume that interest rates on 20 year Treasury and corporate bonds with different ratings all of which arenoncallable are as follows T bond 7 72 A 9 64 AAA 8 72 BBB 10 18 The differences in rates among these issues were most probably caused primarily by a Real risk free rate differences b Tax effects c Default risk and liquidity differences d Maturity risk differences e Inflation differences 2 Taggart Inc s stock has a 50 chance of producing a 19 return a 30 chance of producing a 10 return anda 20 chance of producing a 28 return What is the firm s expected rate of return Do not round yourintermediate calculations a 7 45 b 8 49 c 6 90 d 6 62 e 7 73 3 Malko Enterprises bonds currently sell for 1 000 They have a 6 year maturity an annual coupon of 75 and apar value of 1 000 What is their current yield a 8 55 b 8 85 c 6 98 d 7 28 e 7 50 4 Calculate the required rate of return for Climax Inc assuming that 1 investors expect a 4 0 rate of inflationin the future 2 the real risk free rate is 3 0 3 the market risk premium is 5 0 4 the firm has a beta of1 00 and 5 its realized rate of return has averaged 15 0 over the last 5 years Do not round your intermediatecalculations a 14 04 b 14 64 c 11 40 d 13 20 e 12 00 Copy of Practice Test II FIN 331 Chapters 6 8 5 Dothan Inc s stock has a 25 chance of producing a 31 return a 50 chance of producing a 12 return anda 25 chance of producing a 18 return What is the firm s expected rate of return Do not round yourintermediate calculations a 10 18 b 9 25 c 9 81 d 9 71 e 8 42 6 Radoski Corporation s bonds make an annual coupon interest payment of 7 35 every year The bonds have apar value of 1 000 a current price of 1 080 and mature in 12 years What is the yield to maturity on thesebonds a 5 10 b 7 40 c 6 31 d 5 55 e 6 38 7 Cheng Inc is considering a capital budgeting project that has an expected return of 18 and a standard deviationof 30 What is the project s coefficient of variation Do not round your intermediate calculations Round thefinal answer to 2 decimal places a 2 08b 1 83c 1 45d 1 67e 1 40 8 Morin Company s bonds mature in 8 years have a par value of 1 000 and make an annual coupon interestpayment of 65 The market requires an interest rate of 7 0 on these bonds What is the bond s price a 970 14b 941 04c 911 93d 1 173 87e 1 105 96 9 Assume that you are considering the purchase of a 20 year noncallable bond with an annual coupon rate of9 5 The bond has a face value of 1 000 and it makes semiannual interest payments If you require an 10 9 nominal yield to maturity on this investment what is the maximum price you should be willing to pay for thebond a 1 028 85b 700 68c 886 94d 904 67e 1 108 67Copy of Practice Test II FIN 331 Chapters 6 8 10 Adams Enterprises noncallable bonds currently sell for 1 460 They have a 15 year maturity an annual couponof 85 and a par value of 1 000 What is their yield to maturity a 3 47 b 4 28 c 3 64 d 4 71 e 5 31 11 Sadik Inc s bonds currently sell for 1 240 and have a par value of 1 000 They pay a 105 annual coupon andhave a 15 year maturity but they can be called in 5 years at 1 100 What is their yield to call YTC a 6 16 b 6 48 c 6 03 d 7 72 e 4 86 12 Bae Inc is considering an investment that has an expected return of 35 and a standard deviation of 10 Whatis the investment s coefficient of variation Do not round your intermediate calculations Round the final answerto 2 decimal places a 0 29b 0 26c 0 28d 0 33e 0 24 13 Ryngaert Inc recently issued noncallable bonds that mature in 15 years They have a par value of 1 000 and anannual coupon of 5 7 If the current market interest rate is 7 1 at what price should the bonds sell a 978 09b 681 17c 707 37d 1 074 15e 873 29 14 Tom O Brien has a 2 stock portfolio with a total value of 100 000 55 000 is invested in Stock A with a beta of0 75 and the remainder is invested in Stock B with a beta of 1 42 What is his portfolio s beta Do not round yourintermediate calculations Round your final answer to 2 decimal places a 0 95b 1 05c 1 00d 1 06e 1 16Copy of Practice Test II FIN 331 Chapters 6 8 15 Dyl Inc s bonds currently sell for 1 010 and have a par value of 1 000 They pay a 65 annual coupon andhave a 15 year maturity but they can be called in 5 years at 1 100 What is their yield to maturity YTM a 6 39 b 7 80 c 5 31 d 5 95 e 6 65 16 Cooley Company s stock has a beta of 1 48 the risk free rate is 2 25 and the market risk premium is 5 50 What is the firm s required rate of return Do not round your intermediate calculations a 10 39 b 10 70 c 11 43 d 9 35 e 9 87 17 Bill Dukes has 100 000 invested in a 2 stock portfolio 72 500 is invested in Stock X and the remainder isinvested in Stock Y X s beta is 1 50 and Y s beta is 0 70 What is the portfolio s beta Do not round yourintermediate calculations Round the final answer to 2 decimal places a 1 60b 1 15c 1 41d 1 28e 1 47 18 Porter Inc s stock has an expected return of 11 00 a beta of 1 25 and is in equilibrium If the risk free rate is2 00 what is the market risk premium Do not round your intermediate calculations a 8 35 b 8 78 c 6 48 d 7 20 e 6 12 19 Which of the following events would make it more likely that a company would call its outstanding callablebonds a The company s bonds are downgraded b Market interest rates rise sharply c Market interest rates decline sharply d The company s financial situation deteriorates significantly e Inflation increases significantly Copy of Practice Test II FIN 331 Chapters 6 8 20 A Treasury bond has an 8 annual coupon and a 7 5 yield to maturity Which of the following statements isCORRECT …
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