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sample exam

sample exam

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Published by Behnoud Zadeh
finance
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Published by: Behnoud Zadeh on Feb 03, 2013
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08/17/2013

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Finance 333 Investments
Practice Questions for Midterm II
Winter 2004Professor Yan
1. The market portfolio has a beta of a. 0.*b. 1.c. -1.d. 0.5.e. none of the aboveBy definition, the beta of the market portfolio is 1.2. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. Accordingto the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal toa. 0.06.b. 0.144.c. 0.12.*d. 0.132e. 0.18E(R) = 6% + 1.2(12 - 6) = 13.2%.3. According to the Capital Asset Pricing Model (CAPM), fairly priced securitiesa. have positive betas.*b. have zero alphas.c. have negative betas.d. have positive alphas.e. none of the above.A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).4. According to the Capital Asset Pricing Model (CAPM),a. a security with a positive alpha is considered overpriced.b. a security with a zero alpha is considered to be a good buy.c. a security with a negative alpha is considered to be a good buy.*d. a security with a positive alpha is consider to be underpriced.e. none of the above.A security with a positive alpha is one that is expected to yield an abnormal rate of return, based onthe perceived risk of the security, and thus is underpriced.5. Security X has an expected rate of return of 0.11 and a beta of 1.5. The risk-free rate is 0.05 and themarket expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security isa. underpriced.b. overpriced.*c. fairly priced.
 
 
d. cannot be determined from data provided.e. none of the above.11% = 5% + 1.5(9% - 5%) = 11.0%; therefore, the security is fairly priced.6. What is the expected return of a zero-beta security?a. The market rate of return.b. Zero rate of return.c. A negative rate of return.*d. The risk-free rate.e. None of the above.E(R
S
) = r
+ 0(R
M
- r
) = r
.7. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has ayield to maturity of 10%. The intrinsic value of the bond today will be if the coupon rate is7%.a. $712.99b. $620.92c. $1,123.01*d. $886.27e.
 
$1,000.00FV = 1000, PMT = 70, n = 5, i = 10, PV = 886.278. A coupon bond that pays interest semi-annually has a par value of $1,000,matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of thebond today will be if the coupon rate is 8%.*a. $922.78b. $924.16c. $1,075.80d. $1,077.20e. none of the aboveFV = 1000, PMT = 40, n = 10, i = 5, PV = 922.789. A coupon bond that pays interest of $100 annually has a par value of $1,000,matures in 5 years, and is selling today at a $72 discount from par value. The yieldto maturity on this bond is .a. 6.00%b. 8.33%*c. 12.00%d. 60.00%e. none of the aboveFV = 1000, PMT = 100, n = 5, PV = -928, i = 11.997%10. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturityat that time. The coupon interest rate was 10% and the par value was $1,000. At the time youpurchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first
 
 
interest payment and the yield to maturity continued to be 8%, your annual total rate of return onholding the bond for that year would have been .a. 7.00%b. 7.82%*c. 8.00%d. 11.95%e. none of the aboveFV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46FV = 1000, PMT = 100, n = 5, i = 8, PV = 1079.85HPR = (1079.85 – 1092.46 + 100) / 1092.46 = 8%11. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years,has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield onthis bond is .a. 9.39%b. 10.00%*c. 10.65%d. 12.00%e. none of the aboveFV = 1000, n = 4, PMT = 100, i = 12, PV= 939.25$100 / $939.25 = 10.65%.12. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If thebond matures in 8 years, the bond should sell for a price of today.a. 422.41*b. $501.87c. $513.16d. $483.49e. none of the above$1,000/(1.09)
8
= $501.8713. The yield to maturity on a bond is .a. below the coupon rate when the bond sells at a discount, and equal to the coupon rate whenthe bond sells at a premium.*b. the discount rate that will set the present value of the payments equal to the bond price.c. based on the assumption that any payments received are reinvested at the coupon rate.d. none of the above.e.
a
,
b
, and
c
.The reverse of 
a
is true; for
c
to be true payments must be reinvested at the yield to maturity.14. A bond will sell at a discount when .a. the coupon rate is greater than the current yield and the current yield is greater than yield tomaturityb. the coupon rate is greater than yield to maturityc. the coupon rate is less than the current yield and the current yield is greater than the yield tomaturity

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