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Exam 29: Basic Financial Tools: a Review

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Question 61

True/False

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As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

A) True
B) False

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Question 62

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If D₁ = $1.25,g (which is constant) = 5.5%,and P₀ = $44,what is the stock's expected total return for the coming year?

A) 7.54%
B) 7.73%
C) 7.93%
D) 8.13%
E) 8.34%

F) A) and C)
G) A) and B)

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Question 63

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The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Stuart Company's manager believes that economic conditions during the next year will be strong,normal,or weak,and she thinks that the firm's returns will have the probability distribution shown below.What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population,not a sample.) $\begin{array}{c}\begin{array}{lll} \text {Economic}\\ \underline{\text {Conditions}}\\\text {Strong}\\\text {Normal}\\\text {Weak} \end{array}\begin{array}{lll}\\\underline{\text {Prob.}}\\ 30 \% \\ 40 \% \\ 30 \% \end{array}\begin{array}{lll}\\\underline{\text {Return}}\\ 32.0 \% \\10.0 \% \\ -16.0 \% \end{array}\end{array}$

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education,and you must withdraw the money in 4 equal installments,beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

Ellen now has $125.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Midway through the life of an amortized loan,the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,its standard deviation.

Nystrand Corporation's stock has an expected return of 12.25%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 5.00%,what is the market risk premium?

Which of the following statements is CORRECT?

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Which of the following statements is CORRECT?

Julian and Jonathan are twin brothers (and so were born on the same day) .Today,both turned 25.Their grandfather began putting $2,500 per year into a trust fund for Julian on his 20th birthday,and he just made a 6th payment into the fund.The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Julian's 65th birthday.The grandfather set things up this way because he wants Julian to work,not be a "trust fund baby," but he also wants to ensure that Julian is provided for in his old age. Until now,the grandfather has been disappointed with Jonathan and so has not given him anything.However,they recently reconciled,and the grandfather decided to make an equivalent provision for Jonathan.He will make the first payment to a trust for Jonathan today,and he has instructed his trustee to make 40 additional equal annual payments until Jonathan turns 65,when the 41st and final payment will be made.If both trusts earn an annual return of 8%,how much must the grandfather put into Jonathan's trust today and each subsequent year to enable him to have the same retirement nest egg as Julian after the last payment is made on their 65th birthday?

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? $\begin{array} { l c r } &\text {A}&\text {B}\\\text { Price } & \$ 25 & \$ 25 \\\text { Expected growth (constant) } & 10 \% & 5 \% \\\text { Required return } & 15 \% & 15 \%\end{array}$

When a loan is amortized,a relatively low percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage increases in the loan's later years.